As many of you know in my former life as a CPA, I was a tax partner at a large accounting firm. In this role, for 20 years, I paid very close attention to the changes in the tax law and how they affected my corporate and business clients. So, I was particularly interested in the tax reform that was signed into law in December and how they will impact my mortgage clients.
It is not an understatement to say that the tax bill signed in December is the most significant change to the Internal Revenue Code since the Tax Reform Act of 1986. In many ways, it is a structural change that eliminates a lot of personal and business deductions (i.e. legal loopholes) in exchange for lower overall tax rates. It also significantly impacts investment in the U.S., repatriation of earnings held outside of the country by companies such as Apple, Google, Amazon and many others (estimated to be as high as $4 trillion dollars). Surprisingly, it also impacts the real estate and the mortgage industry in a significant way.
Following are the four areas of the tax bill that will have the largest impact on owners of real estate.
- The deduction for state and local taxes (this includes property taxes) is now limited to $10,000 annually;
- Beginning in 2018 mortgage interest is only deductible for mortgages up to $750,000. Under prior law the cap was $1 million.
- Beginning in 2018 interest on Home Equity Lines of Credit (“HELOC’s”) will no longer deductible. (This applies to existing HELOC’s as well as new HELOC”S); and
- An increase in the standard deduction to $24,000 annually which will mean fewer people will be eligible to itemize which means that their current mortgage interest, property taxes and other itemized deductions will not be deductible at all.
The change that may lead to the most activity in 2018, is that many people who have HELOC’s in place should evaluate whether it makes sense to consolidate their HELOC with the first mortgage before interest rates start to rise (see the interest rate outlook in the article in this issue that looks forward to 2018).
The second thing I would encourage everyone to do, is to have their tax preparer, as part of the preparation of the 2017 tax return, prepare an analysis of how their tax situation will be impacted in 2018 by the new tax law.
Each of the provisions outlined above, will result in a significant amount of deductions being lost by homeowners. Additionally, there are many other changes that will likely affect that tax situation of many people in addition to the 4 items outlined above. The good news, is that for most people, the reduction in the tax rate will offset the loss of the deductions.