Beginning on January 1, 2018 the new tax law signed by President Trump went into effect, formerly referred to as “The Tax Cuts and Jobs Acts” (TCJA). This new tax law has a significant effect on the tax breaks that homeowners were previously able to claim and could cause first time home buyers to lose some of their interest in making the move from renting to home buying. According to Forbes.com, “barring new legislation, in 2026 the law will revert to its prior state, with interest on up to $1.1 million in mortgage and home equity debt again deductible”. But, should first time homebuyers really wait until 2026 to purchase their homes? The answer for most people who are eager to own homes of their own, would be no.
In the past, the ability to deduct home mortgage interest on your Federal tax return was a significant incentive for homeownership over renting. Since mortgage payments in their early stages are largely comprised of interest rather than principal, a homeowner could typically deduct most of their mortgage payments for the year on their Federal tax return – meaning they save money on the taxes paid. Now that the new tax law has been enacted, homebuyers will be affected in two major ways. First, as Norada Real Estate Investments states, “any home mortgage interest debt incurred after (December 15, 2017) will be limited to no more than $750,000 qualifying for the home mortgage interest deduction”. The result of this could mean fewer people buying more expensive homes, or homeowners being less inclined to upgrade to a newer, more expensive home. According to SmartAsset.com, even the priciest homes in Maryland have an “average listing price (of) $649,954”, meaning that many homebuyers in Maryland may not be affected by this aspect of the new tax law when buying the average house.
Another way TCJA affects homebuyers is that it has “increased the standard deduction to $12,000 for single filers and $24,000 for married taxpayers who file taxes jointly. The standard deduction is the amount by which you can reduce your taxable income” (USNews.com). Tax payers have the ability to either take the standard deduction or to itemize deductions. With the new tax reform USNews.com states that “taxpayers who previously itemized their returns may not find it necessary to do so.”
In addition, the new tax reform “will hit those with high property tax bills hardest,” according to USNews.com because of the new limits on the allowable deductions on their SALT taxes (State and Local Tax). “The Tax Cuts and Job Acts” will impact homebuyers’ tax deductions and may lessen the tax deduction incentive for homeownership but is no reason to forgo the homebuying process. Buyers will still be able to reap the benefits of being able to have the independence and joy associated with homeownership, such as the stability associated with a fixed-rate mortgage loan as opposed to the periodic increases in rent and the ability to provide a more stable family environment because home purchases tend to be longer investments than rental homes.