April 15th has finally passed. Every year we hold our breath until this day is in our rearview mirror, especially this year. Let’s see how some of the changes impacted property owners and take a glance at the future.
Mortgage interest and state and local tax deductions have been the most controversial changes in the new tax code. The capping of state and local tax deductions has been a blow to states where these taxes are high and where homeowners own more than one property, driving families to make tough decisions about where to live.
However, of the two, the mortgage interest deduction is the one that could change the face of real estate. The eligible deductible mortgage interest was capped at real estate sales for $750,000 or less, this was reduced from $1 million. But this only tells part of the story; the real change is the doubling of the standard tax deduction to $12,000 for single people and $24,000 for married couples, making the mortgage interest deduction for many homeowners irrelevant.
So far less than half as many American homeowners are claiming the mortgage interest deduction for 2018 taxes than last year. When all tax filings are completed, it is estimated that the number of taxpayers who take the mortgage interest deduction will fall from 20 percent of returns in 2017 to 8 percent of returns in 2018.
For many economists, this is long overdue and could be the first nail in the coffin of the mortgage interest deduction being suspended permanently. The mortgage interest deduction has been in effect since 1913 when the income tax was created, and it was always assumed that the mortgage interest deduction encouraged homeownership, however, study after study does not agree with this. Our close allies, Canada, the United Kingdom and Australia have no mortgage deductions and their homeownership rates are slightly higher than in the United States. Further, this subsidy reduced federal revenues by about $60 billion a year now down to around $30 billion. In addition, the mortgage interest deduction encourages homeowners to purchase larger homes with larger debt, increasing the likelihood of default and many believe has an environmental impact.
And as if New York City doesn’t have enough problems with a soft real estate market and high taxes, now the tax gun is pointed at the ultra-rich. There is already a “mansion tax” in effect in New York of 1 percent of purchased properties valued above $1 million, which doesn’t buy you much in New York City. Now the city wants to impose an additional tax starting at 0.5 percent a year on property valued over $5 million graduating up to 4 percent on property value that exceeds $25 million. How would you like to be a high-end real estate broker in New York if that happens?
As a final note on taxes, now that 2017’s tax returns are hopefully in the file cabinet, it’s probably a good time to have a chat with your accountant relative to payroll deductions. The tax overhaul did decrease weekly withholdings for most people resulting in smaller tax refunds than some people anticipated.
So, congratulations – you made it through a very hairy tax year. Now you can sit on the beach, read trashy novels and make the rounds of island restaurants. You deserve it after surviving the largest tax overhaul in a generation.
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