What Trump's proposed tax plan means for 2018 homeowner deductions

Believe it or not, tax season is right around the corner, and if you’ve turned on the news recently, you’ve probably heard that the start of 2018 could bring big changes to the way you file. This is especially true for those thinking of purchasing a home since some of the tax benefits of buying are under intense scrutiny.

Analysis from Open Listings shows that the proposed Tax Cuts & Jobs Act will impact most potential homebuyers living in major metro areas where property values are often higher than the $500,000 mortgage interest debt limit set by the new tax plan.

Homebuyers living in competitive markets, especially first-timers with FHA or VA loans who carry higher mortgage loan debt heavily benefit from the mortgage interest deduction.

For them, lower mortgage tax deduction limits with the Tax Cuts & Jobs Act could mean rising homeownership costs. This especially hits hard for California homebuyers.

According to the Open Listings database, 48.4% of all active listings in California from the past 30 days are over $500,000. This number skyrockets in metro areas like Los Angeles, where that number is 68.9%, and San Francisco, where 94.6% of all active listings are over $500,000.

If you’re unsure about how you might be impacted by the new policies, we’ve taken the liberty of doing the research for you.

Read on below for a break down what the proposed tax code changes that just passed through the House of Representatives are, what they could mean for the real estate market, and why it might make sense to become a homeowner sooner rather than later.

How the tax code works now

Everyone who’ve earned income in the past year is required to file a tax return. However, depending on how much you’ve made, the percentage of your income that is taxed will vary.

As of right now, everyone who files a tax return in 2018 will fall into one of the following tax brackets:

For people filing individually:

For married couples filing jointly:

For heads of households:

Taking deductions

Regardless of where you fall, you can lower the amount you have to pay in taxes by taking deductions, and you have a choice on how to you want to handle them:

A) You can choose to take a standard deduction:

This is where you subtract a flat amount from your total income and are taxed on the remainder.


B) You can itemize your deductions:

This is when you list out all the specific deductions for which you qualify.

Obviously, you’ll want to choose whichever route leaves you with more untaxed income.

Each year, the IRS adjusts the standard deduction to account for inflation.

In 2018, the proposed standard deductions will be as follows:

Individual or Married, Filing Separately: $6,500

Married, Filing Jointly: $13,000

Head of Household: $9,550

Breaking down the proposed changes under Trump's tax plan

The rhetoric around President Trump’s “Tax Cuts and Jobs Act”, which his administration intends to pass around the end of the year, is that it aims to simplify the tax code.

In some respects, that is true.

For one, it reduces the number of tax brackets from seven to four. Under his plan, the tax brackets would be as follows:

For individuals those filing separately:

For those filing jointly:

Under the guise of making things simpler, Trump’s plan also offers incentives to choose taking the standard deduction rather than choosing to itemize.

If this new plan passes, the standard deduction would more than double. It would grow to:

For Single Filers: $12,700

For Those Filing Jointly: $24,400

What these new deductions mean for homeowners

While those may seem like large figures upfront, keep in mind that the plan also intends to do away with many deductions that people - especially homeowners - depend on to lower their tax bill beyond that flat amount.

In particular, the “Tax Cuts and Jobs Bill” also:

  • Cuts the amount of private mortgage insurance & mortgage debt deductions that new homeowners can write off at $500,000 (It’s now $1,000,000.)
  • Limits the amount of property taxes you can deduct to $10,000
  • Eliminates your ability to deduct state and local taxes

As it stands, the vast majority of homeowners choose to itemize their tax returns.

Especially in the first few years of homeownership when your payments to private mortgage insurance will be at their highest, that singular write-off may be worth more than the the standard deduction, let alone when combined with your property taxes and any other deductions that you qualify for.

However, if President Trump’s plan passes, the increase in standard deduction means fewer people would see the benefit of itemizing.

Those who buy a home under this proposed tax plan, especially those in high-price areas like cities, will likely find that the cap to the private mortgage insurance deduction leaves them doubly-taxed if their mortgage loan is over $500,000. The same is true with the cap on property taxes.

Under the Trump plan, we may also see an increase in rental properties.

Since owners of second homes would have to account for extra property taxes and mortgage insurance payments that they typically write off on these properties, many will likely want to find tenants to help offset the cost.

The bottom line

As it stands, there’s no way to tell if the “Tax Cuts and Jobs Plan” will get through the Senate.

But, if it does, some of the longheld tax benefits of buying will no longer be available to new homeowners. (Remember, current homeowners won’t be subject to new the mortgage insurance limits.)

While only you and your financial advisor can ultimately make the decision if buying a home is right for you, if you’ve been thinking about getting into the market, now may be a good time, as the proposed tax plan will not affect mortgages originated before it passes.