As 2017 ends, one of the big questions for Denver home owners and those looking to buy a home is how the new federal tax law will impact each of us financially and how the new bill will impact the Denver housing market. The very clear winner in the recently passed bill is the corporate world. Corporate tax rates will drop from their current 35% rate to just 21%. It is less clear how we, the consumers, will fare. The results will vary greatly depending on your income level and the value of your home.
How do we make sense of the new bill and its impact on those who own homes in Denver and those who would like to own homes? Their are three major changes that will impact home owners and could impact the housing market.
1. Change Number One: The Mortgage Interest Deduction (MID) One of the incentives in the past for purchasing a home has been the ability to deduct the amount of interest paid each year on home mortgages from our federal taxes, thus lowering our taxable income. This deduction can be taken if tax payers itemize their taxes. Currently, home owners can deduct the interest on loans of up to 1 million dollars. The new bill lowers the interest deduction on loans of 1 million to loans of $750,000 or less on new home purchases. For those who purchased their homes prior to December 15, 2017 the 1 million dollar cap on the loan amount is still in place. For those buying homes after December 15, 2017, the new limit is $750,000. In markets like Denver, where the median home price is $376,000, this cap will not make a big difference to the majority of home owners and buyers, although it could impact the luxury market. In Colorado, where many people own vacation homes, the cap still applies. You can add the loan amount of your primary residence and your vacation home together and deduct the interest on loans up to 1 million dollars if you already own the properties.
2. Change Number Two: SALT deductions have been capped at $10,000. Currently taxpayers can deduct all of their state and local property and income taxes (SALT) from their Federal tax return if they itemize. This deduction has now been capped at a maximum of $10,000. Again, for Colorado this change probably won't greatly effect the average consumer as we have relatively low property taxes and income taxes compared to states like California and New York. For a comparison, in Denver you can expect to pay approximately $1760.00 in property taxes on a home worth $376,000. In California the property taxes on the same home would be approximately $3000 and in New York you would pay close to $8300. Similarly, Colorado has a flat 4.6% income tax regardless of how much you earn. Residents in New York start with a base tax rate of 6.6% and the rate goes up based on tax brackets. California starts their tax rate at 7.5% and it goes up from there. Because of Denver's affordable tax rates, we don't believe the change in SALT deductions will greatly impact the majority of home owners.
3. Change Number Three: The standard deduction has been doubled. Currently single filers have a standard deduction of $6350. This deduction will go up to $12,000 starting in 2018. Joint filers will see their standard deduction increase from the current rate of $12,700 to $24,000. This is the piece of the new bill that seems to be the hardest to quantify in terms of its impact on the housing market. For many filers, the higher standard deduction will be greater than the itemized deductions of the MID and SALT deductions. It seems likely that many people will choose not to itemize their taxes, thus practically doing away with these deductions. The question is if people will be less likely to buy if one of the perks of home ownership (MID and SALT deductions) goes away, which it does in a practical sense with the higher standard deduction. Will this change impact the motivation and psychology of buyers? This is the great unknown.
All economic and growth experts are predicting that real estate will continue to go up in value in Denver and because of this, it is still a great investment. As we head into 2018, it looks to be an interesting year in the real estate market as we see the new laws unfold!
Please reach out to us with any questions or if we can help you find your dream home!
Happy New Year and Happy House Hunting!
Doug and Suzanne Baity