Scott Bayens: Home ownership in the age of Trump
December 23, 2017
It was with great fanfare this week that Republicans in both the House and the Senate got a legislative "win" and passed the first major overhaul of our tax code since Reagan was in office.
Now that the smoke has cleared and the ink is dry, what are the American people really left with? After all, there were no hearings, and regular order was ignored. As the proposal fast-tracked through both houses, with no real time for intensive review by either party, and perhaps because of the haphazard nature of the process, there was wild speculation about who would benefit and, more importantly, what others might stand to lose.
One of those unknowns were historical tax breaks designed to encourage home ownership and subsequent investment. Subject to scrutiny and in some ways, under attack, were the capital gains exclusion, mortgage interest deduction and state and local income tax deductions. Proposals on the future of these programs varied wildly, but all, it seemed, would be eliminated or at least scaled back in some way. As home ownership and associated lending are a significant driver and indicator of this nation's overall economic health, to say these changes were "a bit unnerving" would be an understatement.
In the end, and thanks to pressure from Grand Old Party fiscal conservatives, as well as intense lobbying by groups like the National Association of Realtors, many of the tax protections for homeowners were preserved:
• Capital gains exclusion: In a huge win for current and prospective homeowners, current law was left in place on the capital gains exclusion of $250,000 for an individual and $500,000 for married couples on the sale of a home. Both the House and the Senate had sought to make it much harder to qualify for the exclusion.
• Mortgage interest deduction: The maximum mortgage amount for households deducting their mortgage interest was decreased to $750,000 from the current $1 million limit. The House bill sought a reduction to $500,000.
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• State and local tax deductions: Both property taxes and state and local income taxes will remain deductible, although with a combined limit of $10,000. Both the House and Senate bills sought to eliminate the state and local income tax deduction altogether.
However, there were also some significant set-backs — changes to the IRS code that will certainly hit existing and potential homeowners squarely in the pocketbook.
• Mortgage interest: Interest paid on home-equity loans will no longer be deductible beginning in fiscal 2018. And while the deduction pertaining to mortgage interest drops to $750,000 on your primary residence, it remains $1 million for homes purchased before Dec. 15 of this year.
• Vacation and second homes: After this year, the interest paid on loans for vacation and second homes is no longer deductible. However, if you rent your vacation home, you can write off associated costs, which would include a portion of mortgage interest and property taxes.
• State and local tax deductions: Because property and state and local taxes have been combined and now limited to a $10,000 total deduction, states like California and New York where home prices and taxes are higher, will have more to pay.
And it's important to note that the only way to take advantage of deductions related to home ownership is to itemize your tax returns. And because the GOP tax bill doubles the standard deduction for all taxpayers (to $24,000 from $12,700 for married couples) the combined value of all available deductions would need to exceed that new amount for itemizing to make sense. Tough luck for those with lower incomes and less expensive homes.
For the first time since the end of World War II, the percentage of Americans who own their own home is down. Thanks to steady cost of living increases, higher home prices and lower wages, the so-called American Dream is truly in jeopardy. So, it's absolutely mind-boggling to many in the multi-billion-dollar housing industry that these carefully crafted incentives suddenly and unexpectedly found themselves on the proverbial chopping block. For most of us, our home is simply the largest expenditure we'll ever make and largest asset we will ever own.
Thanks to the free market and aforementioned tax benefits, home ownership is designed — and to some degree subsidized by the federal tax code — to grow collective wealth over time. A home's equity has great potential and represents one of the most stable long-term investments available to those who maintain good credit, have dependable income and can come up with a down payment. The more equity that accrues, the more homeowners tend to spend, and in turn, gets pumped into local, state and national economies; a win-win scenario to be sure.
This reform package certainly doesn't increase the benefits. But for those considering buying their first home, the tax benefits remain substantial. As we often say in the real estate business, "80 percent of something is better than 100 percent of nothing," not to mention pride of ownership and becoming "the master of one's domain." Ignoring the available incentives is like not participating in your employers 401K matching program, like leaving money on the floor.
The bottom line is the power of these combined entitlements can make it possible for a renter paying $2,000 a month in rent to easily afford a $3,000 monthly mortgage note. That's the real beauty of the current system and why it must be protected. But not everyone knows what they are missing, so it's key to find a real estate professional who can help explain. For now, the American Dream remains alive and well for those who know and use the breaks.
Scott Bayens is a broker with Aspen Snowmass Sotheby's International Real Estate in Aspen-Snowmass with more than a decade of experience with buyers and sellers. He's been a renter, homeowner, landlord and investor through every kind of market. Scott can be reached at email@example.com.