Understanding the New Tax Code and how it Encourages Buying in the Hudson Valley
Buying a home in the Hudson Valley for under $400,000 with an average tax of $8000-$12,000 a year has now become the new normal for city dwellers who work 2-3 days in the city and from home. You can still have your dream house… you may have to travel a little further from NYC… Metro North out of Poughkeepsie or Wassaic provides very reliable service to Grand Central and at Peak hours your destination can be reached in less than an hour and 45 minutes. Think of all the work you can get done on the train. Before the new tax law reared it’s ugly head, buying in areas closer to the city was preferred but now I am discovering that more people will travel a little further for lower prices and lower taxes. Where you choose to live is now playing a greater role than ever in how this tax overhaul is going to affect your overall tax burden.
President Trump signed the new Tax Cut and Jobs Act into law three days before Christmas 2017. Now it’s up to our accountants and attorneys to interpret this legislation and help us sort through our options. For this blog I am mainly speaking to you as a seller or potential buyer of real estate.
Let’s break it down and briefly talk about how this new law may impact the housing market in your area and your selling or home buying strategy. I’m going to try to keep this simple for us…
First of all, anyone who took out a mortgage on December 14 or earlier will still be able to deduct interest on up to $1 million in debt for that home, even if you refinance to get a lower rate.
It’s important to know that before the new law was signed, you could take a deduction on the interest of up to $100,000 in home equity debt to improvement on your home. *The newly signed legislation is wiping out this deduction for home equity, including existing loans, beginning in 2018. If we are lucky, this law will revert back in 2026, but we have to look out for any new legislation which might come up between now and then.
Now, some sobering news… let’s talk about the new Mortgage interest deduction… Simply, If you plan to buy a home between now and 2026, you will only be able to deduct the interest on up to a $750,000 mortgage debt that is used to purchase and, or improve your home. No more deducting the interest of up to $100,000 in a Home Equity loan…See* above… Since most homes in the Hudson Valley are worth far less than $750,000, this change alone will not increase housing costs for the majority of home buyers. All the more reason to buy up north.
Let’s talk state and local tax deductions… With the old tax law all property taxes paid to the state and local government could be claimed as an itemized deduction. It was also possible to deduct state and local income and sales taxes. These are called “Salt” taxes and the new law bundles these together and limits the deduction, in total, to $10,000 for both individuals and married couples. In higher priced area closer to the city $10,000 does not come close to covering their combined property and income tax bills.
Yes, you could argue that it does not matter whether tax savings come from an itemized or standard deduction. Nevertheless, eliminating the tax incentive to buy a home is a major shakeup to residential real estate industry. It may work as a benefit to the first-time home buyer if reduced tax benefits do lower home prices. The biggest win for us may be that the final bill maintains the exclusion for capital gains from the sale of a primary residence. This means a taxpayer who sells a home may exclude up to $250,000 of gain from taxation ($500,000 if married filing jointly) if you have owned and used the home as a primary residence for two of the past five years.
All buyers and sellers have unique tax profiles and while these are the broad strokes of the new tax code, each individual should consult with their own accountant prior to making an investment decision.