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The new tax law brings many changes for individuals and corporations. While some of the individual changes may not appear to be totally positive for home ownership, the net-effect upon housing could very well turn out to be positive. Putting more spending money in the hands of consumers could boost the economy, which would create jobs and more demand for housing.
The new law did not change the benefit of owning and then selling a home as compared to other investments, as the capital gains exclusion for primary residences was not touched. Therefore, while the benefit of tax write-offs may become less important, a home could become an even better investment. In addition to the investment benefit, homes also provide protection against inflation and forced savings plans, while renting provides none of these benefits.
The tax law is designed to put more money in the hands of consumers by lowering the tax rates and increasing the standard deduction. The higher standard deduction will mean that fewer individuals will itemize deductions. The maximum mortgage amount for which interest can be written off has been lowered from one million dollars to $750,000, though this provision does not apply to existing financing in place. Along with the lower maximum loan amount, deductions for state and local income and property taxes are capped at $10,000 starting in 2018 and home equity loan interest is no longer deductible.
Note that the tax law is very new, and the IRS has not issued regulations or instructions to implement the law. This information provided is based only upon what has been published by the media reporting upon the law. We expect many clarifications, and perhaps even technical amendments, to the law in the coming months. We suggest you speak with your accountant for tax advice based upon the new law and for updates as they are issued.
Tax Law Makes Projections Even Harder
It is the first of the year and we have been inundated with projections regarding the economy, interest rates, real estate and more. It is always hard to predict the future and this year is going to be even harder to predict because of a new variable -- the tax law. As we have mentioned previously, the lowering of tax rates is likely to stimulate an already strengthening economy. This should be good news for jobs, retailers and more. The question remains how strong will the economy get and what will the effects be on interest rates, oil prices -- and ultimately inflation. We have already seen rates and oil prices creeping up in anticipation of the action.
Here is the good news. There are four solid economic reasons to own a home and the tax deduction is only one of these four. The home will still serve as a leveraged investment, a forced savings plan and protection against inflation. As a matter of fact, we feel the tax law's effect upon interest rates may be a more important factor in determining the direction of the real estate markets than the tweaks made in the deductions. In this regard, those who feel that rates will ultimately rise because of the economic effects of the law may very well be inclined to purchase now rather than later.
When we move to real estate, the prediction game gets even harder. Economists were already predicting continued inventory shortages, more new homes coming on-line and moderating price increases. But the change in the standard and mortgage deductions will certainly have to be factored into the equation. The doubling of the standard deduction means that those purchasing on the lower end of the scale are more likely to not take advantage of the deduction of interest on home loans. Likewise, those who own higher priced homes are less likely to make a move because they would lose part of their present deduction.