How Will the New Tax Law Affect You and Your Family?
Perhaps you were one of the many who stood in line on December 29th hoping to pay your 2018 property tax bill early. Or perhaps you were calling Congressman Don Beyer’s office trying to get some questions about the impending changes answered. Or maybe, like us, you have read every article you can find and are still trying to figure out how it all will affect you and your family.
The Patterson Group has had many friends and clients asking us these same questions, and honestly, after speaking to different accountants, mortgage lenders, and industry experts and reading countless articles, the answer is that we are still not all that sure exactly how it will affect each individual person. Every person’s financing situation is different and so we do not want to issue any blanket statements about the changes, but we thought we would unpack how we understand them and how we think they might shape Alexandria real estate.We think Graham Setliff of First Savings Mortgage said it best: “This is not a huge thing. If you have a healthy mixture of a good job, strong economy, and confidence your assets are doing well, these factors will lead you to buying a house. You are not going to buy a house because of a tax break.”
Tax Rate Reductions
The new law lowers tax rates for more individuals:[one_second]
Current Law
10% $0-$19,05015% $19,050-$77,40025% $77,400-$156,15028% $156,150-$237,95033% $237,950-$424,95035% $424,950-$480,05039.6% $480,050+[/one_second][one_second]
Tax Cuts and Job Act
10% $0-$19,05012% $19,050-$77,40022% $77,400-$165,00024% $165,000-$315,00032% $315,000-$400,00035% $400,000-$600,00037% $600,000+[/one_second]Source
There are three general mindsets when buying a home:
First-time homebuyers
Nine out of 10 times, these folks are strictly concerned with how their mortgage will compare to their rent.
Mid-level or move-up buyers
Or, those who really don’t have to move but are looking for another bedroom, more space, a garage, etc. These buyers are generally wondering how their payment now will compare to their payment later.
Downsizers
How do I shrink my payment or pay cash and have less overall to take care of in a home?
Let’s look at how these three mindsets could -- or could not -- be affected by the tax law.
Mortgage Interest Deduction
The law reduces the limit on mortgage interest deductions to $750,000 for new loans, down from $1,000,000. It allows these deductions on first and second homes and will revert to $1,000,000 in 2026. Existing mortgages are unaffected.
The Patterson Group’s Thoughts
While a $750,000 mortgage deduction is significantly better than the original $500,000 the House bill proposed, a $750,000 cap is going to affect those in the mid-level homes that are debating their next move. Depending on the buyer’s financing, these would be homes priced at $825,000 (assuming 10% down) to $900,000 (assuming 20% down). This is where our inventory is at historic lows. It’s possible the law may cause a slow-down in an already-low inventory price point, as sellers may choose to stay a little longer than originally planned while they try to understand the implications on their wallets. At the end of the day, they will move. We do anticipate a low inventory in these price points for the next few months, though. If you are a seller, now would be a great time to list!
Deduction of State and Local Taxes (“SALT”)
The final law allows for an itemized deduction of up to $10,000 for the total of state and local property taxes. Previously, there was not a limit on this deduction.
The Patterson Group’s Thoughts
The City of Alexandria real estate tax rate for 2017 is $1.13 per $100 of assessment. This will affect homes assessed above $884,956, in that they will not be able to write off their full tax bill. However, the standard deduction has doubled, which should counterbalance the $10,000 cap and the mortgage interest cap. If you, like me, like real/concrete numbers and examples, I highly encourage you to visit the National Association of Realtors website and scroll down to Appendix 2. We certainly do not claim to know all (or most) of the answers, so contact your tax advisor with further questions!