Did Trump’s New Tax Plan Make Buying a Home Unattractive?

Trump Tax Plan

The Tax Cuts and Jobs Act will have its first effect on tax returns this tax season with the 2018 returns.

Of large concern to many is whether homeowners can write off their mortgage interest under the new tax law.

 For people considering buying a home, there have been numerous articles saying that the mortgage interest deduction is effectively gone. Is that true?

  1. It’s true that, for the majority of states in the USA, the new standard deduction will be more than mortgage interest and property taxes, and other itemized deductions in most cases, by a lot. For example, the average home value in 32 states is less than $300,000.  But for coastal states, and California in particular, the majority of homeowners buying in 2018 and later will almost certainly be itemizing their deductions. As a matter of fact, a single person buying a home today would pass the $12,000 standard deduction buying a condo for $250,000, with a $200,000 loan. Married couples would surpass $24,000 buying a $500,000 home with a $400,000 loan. And that’s just with mortgage interest and property taxes, excluding any other eligible deductions.
  2. While most will itemize, the new standard deduction is nearly double what it was, so the difference between the standard deduction is and your itemized deductions will be less. In the examples above, the single person’s itemized deductions would be $5,650 lower ($12,000  – $6,350) than they were with the old tax code. Double that for the married couple. So it does have some impact. However, because the new standard deduction is bigger, it means you’ll be getting a bigger write off, whether it’s mortgage interest or not. Consult your tax professional to get the total picture.
  3. However, while no one can predict the future, most the volatility of real estate values has ended since Dodd-Frank Wall Street Reform Act was enacted in 2010. The huge housing bubble caused by the collapse of the sub-prime industry won’t be repeated because of that legislation; a large segment of the population that was able to buy homes with bad credit and little or nothing down is gone. So home buyers can, once again, count on a consistent upward trend in real estate values over the long haul.
  4. Buying a home and paying down the loan as the value goes up remains the best way to buy a bigger home as your family grows, using the equity accrued, and, when the kids are gone, downsize and own a home with a small mortgage or no mortgage at all when you retire.

Relevant articles:

Kiplinger: https://www.kiplinger.com/article/real-estate/T010-C000-S002-where-home-prices-are-headed-in-2018.html

Credit Karma: https://www.creditkarma.com/tax/i/mortgage-interest-deduction-cap/

Zillow: https://www.zillow.com/san-diego-ca/home-values/

Investopedia: https://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp

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