St. Louis Mortgage Help

What Does the New Tax Law Mean for First-Time Buyers?

February 14th, 2018 4:23 PM by Bob Rutledge

With significant changes to the tax code taking effect this year, homeowners and prospective buyers are revising their plans to take advantage of its sweeping changes. Here’s an analysis based on information from the National Association of Realtors and NerdWalllet.

Tax Rate Reductions. Joint filers with incomes of $77,400 to $400,000, which will include most first-time buyers, will see their tax rates decline from two to four percent when they file their 2018 taxes next year.

Mortgage Interest Rate. Changes in the mortgage interest rate—lowering the cap to mortgages worth o $750,000 from 1 million and excluding interest paid on home equity loans— would affect only the wealthiest first-time buyers directly. The changes will make second homes and equity loans more expensive for first-time buyers in the future.

State and Local Taxes. The new law limits the amount of property taxes and other state and local taxes to $10,000 a year. First-time owners, as well as current owners, will lose the ability to deduct thousands of dollars that they can deduct in 2018, increasing the cost of homeownership, especially in high tax states like New York and California. In the State of Missouri most First Time Home Buyers homes will not have an annual property tax anyway near $10,000.

Student Loan Interest Deduction. Potential first-time buyers and their parents who have been burdened with student loan debt will lose the ability to deduct the interest they pay on their loans. As a result, it will cost them more to pay off their debts to reach a DTI that would qualify them for a mortgage. 

Personal Exemptions. Personal exemptions for filers and their dependents, worth $4,150 each in 2017, was eliminated in the new tax law.

Moving Expenses. Taxpayers have been able to deduct some moving expenses related to their employment, but this deduction is eliminated in the new act.

Standard Deduction. Taxpayers must decide whether to take the standard deduction or itemize their deductions. In the past, most homeowners have itemized to take advantage of the mortgage interest deduction and the deduction for state taxes, including property taxes. The new law doubles the size of the standard deduction from $6,000 to $12,000, or $24,000 on a joint return. According to Zillow’s Alexander Casey, under the current setup, roughly 44 percent of U.S. homes are worth enough for it to make sense for a homeowner to itemize their deductions and take advantage of the mortgage interest deduction. Under the new law, that proportion of homes drops to 14.4 percent. 

Impact on First-time Buyers: NAR’s research department modeled examples of homeowners as different income levels, mortgage sizes, and family sizes.  

A single first-time buyer who purchases a home costing $205,000 and takes out a 30-year fixed rate mortgage at 4% interest. She puts down 3.5 percent. Assuming she buys early in 2018, her first-year mortgage interest would total $7,856, and she would pay real property taxes of $2,050. Under the old law, her taxes for 2018 would fall by $2,098; Under the new law, her taxes would rise by $30. Moreover, the difference between renting and owning was $2,098 under the prior law but shrinks to $637 ($6,060 - $5,423), or $53 per month.

A family of five with an income of $120,000 that buys a $425,000 home with a 10 percent down payment on a 30-year fixed mortgage at a 4 percent. Under the old law, they would save $3,219 by buying. Under the new law their taxes would decline only $100, but if they had remained renters, they would receive a tax cut of almost $2,400. Under the prior law, the tax benefit of buying a home was $3,219. Under the new law, they will get a tax cut $948 ($8,999 - $8,051), a much weaker incentive to buy.

 


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