Steve Poltorzycki, an Arlington resident writes about what he sells — local real estate.
The new tax-reform law, the Tax Cuts and Jobs Act (TCJA), went into effect at the beginning of 2018. TCJA makes a number of significant changes to the tax system, some of which are particularly relevant to the housing market. Here are five things current and prospective Arlington home owners need to know about the new tax law:
1. There will be reduced tax benefit to home ownership
TCJA nearly doubles the previous standard deduction. Joint-filers will be able to take a $24,000 standard deduction ($13,000 previously), and single-filers will be able to take a $12,000 standard deduction ($6,500 previously). Itemized deductions related to home ownership, such as mortgage interest and property taxes, will be deductible only to the extent that they exceed the standard deduction. Because the standard deduction has increased almost two-fold, some home owners who previously would have been able to benefit from itemizing mortgage interest and property-tax deductions will no longer be able to do so. And even home owners whose total itemized deductions clear the hurdle will find that their deductions will be less valuable than they were before. The reduced tax advantages of home ownership may depress demand for home purchases, particularly if rental prices decline (or rents increase at a slower rate than home sale prices) and renting becomes a more attractive option versus home ownership than it was before.
2. The prices of higher-end homes will be more affected (than prices of other homes)
The deduction for mortgage interest (if itemizing) will be limited to the interest on $750,000 of home debt for joint-filers and $375,000 for single-filers. Previously, the deductibility cap was on $1,000,000 of home debt for joint-filers and $500,000 for single-filers. Mortgages taken before Dec. 15, 2017, will not be affected by this change. Most affected will be the deductibility of mortgage interest on higher priced homes, those homes with mortgages exceeding $750,000 (for joint filers). Not everyone makes home purchase decisions with tax considerations in mind, but this change can’t help but have some slowing effect on price growth in Arlington’s single-family home market, particularly at the upper end. As of July 2018, 27 percent of the homes sold in Arlington sold for over $1 million (versus 18% in 2017). For owners and prospective owners of these upper end homes, mortgage amounts could well exceed the new deductibility cap.
3. The prices of homes in communities with higher property taxes such as Arlington will be more affected than prices of other homes in other communities
Previously, there was unlimited deductibility of property taxes. Now the property tax deduction (if itemizing) will be limited to $10,000 for joint-filers and $5,000 for single-filers. This will likely have some cooling effect on home price rises in communities such as Arlington with higher property taxes. According to the Massachusetts Department of Revenue, Arlington had the 49th highest average property tax bill in the state in 2017 (out of 351 communities).
4. The supply of homes on the market in communities with highly regarded schools such as Arlington may increase
Top-notch schools draw home buyers who are willing to pay the higher property taxes that usually come with home ownership in towns such as Arlington with highly regarded schools. And once they buy, they are not likely to move even if there is a reduction in the deductibility of property taxes. But other homeowners who do not have and do not plan to have school-age children may find the reduced tax benefit in a higher-property-tax town a sufficient incentive to prompt them to sell and move to a lower-property-tax town. As a result, the supply of homes coming on market may increase in those higher-tax towns, and this may have a cooling effect on the rate of price rises.
5. There are still advantages to home ownership
While for many current and prospective home owners the tax advantages of home ownership may not be as great as they were before, other benefits of home ownership remain unchanged. The chief benefit is that ownership builds wealth when home values appreciate. Also, mortgage payments (if associated with a fixed mortgage) remain the same every month and don’t go up as rents often do. And home owners have far greater control and freedom than renters in modifying, customizing and personalizing the houses in which they live. Owners can take houses and, without asking for a landlord’s permission, make them into homes of which they can be proud.
CENTURY 21 Commonwealth and its sales agents do not provide tax or legal advice. This material is for informational purposes only and is not intended to provide and should not be relied on for tax or legal advice.
Data were collected from MLS PIN and MAR and do not include private transactions. CENTURY 21 Commonwealth and its sales agents make no representation as to the accuracy of the data and are not responsible for any actions taken as a result of use of or reliance on this information.
This column of information by Steve Poltorzycki was published Sunday, Aug. 12, 2018. Please email him at steve[@]stevepolt.com if you would like to receive his real estate newsletter and see his website >>
Read his first column, published in July >>
