Friday, January 19, 2018

2018 off to a good start

OK I'll admit that title is anecdotal. But I am seeing a nice flow of listings and buyers poking around, finding homes, and making offers. Many analysts feel that 2018 will slow the crazy pace in the real estate market to a more healthy and normal 4-5% price appreciation over the course of the year. This is fine by me.

I think the fact that the "threat" of higher rates is now the reality of higher rates, people that we dangling their feet over the fence are starting to jump in. I have made the point time and again that rates are far more important the price. Most people will pay far more in interest than any price deal they might negotiate.

The federal tax revisions that take effect this tax year (2018) many middle income earners will no longer need to itemize and as such the mortgage deduction will no longer benefit them. A married couple paying less than $20,000 a year in mortgage interest may not have enough itemized deductions to exceed the new and improved standard deduction of $24,000 for a family.

As I always state my standard disclosure anytime taxation is discussed: always consult a professional tax prepared or CPA when making decisions based on taxation. That out of the way, the new tax law increased the standard deduction for a married couple from $12,000 to a whopping $24,000. W2 wage earners are those who have a job and the boss cuts a paycheck, withholding money for taxes. W2 wage earners will receive a standard deduction of $24,000 for a married couples and $12,000 for single filers. This is nearly double from previous years! In general this is a good thing. But in order for it to matter you must have more than $24,000 in deductions for a couple or $12,000 for single. That may be a problem for some.

Lets look at a hypothetical taxpayer for a moment, we shall call her Sally.

Sally made $40,000 in 2017 and has a mortgage of $200,000 on her home. She paid $8,700 in interest last year. The standard deduction for 2017 was $6,350. Her mortgage interest exceeds that so filing the "long form" IRS 1040 with a schedule A for itemized deductions makes sense. Why take the standard $6,350 when you have $8,700 in mortgage interest alone. Now Sally can also write off other job related and business expenses. Here is where talking to the tax pro is CRITICAL. Sally needs to make sure that she doesn't take deductions that are not supported by the IRS. OK Sally is smart and she has a trusted tax pro handling her filing each year and he helped her find an additional $2,200 in legit tax deductions. No Sally can't write off those coffee break lattes ;)

Now two 'problems' will arise for Sally this year. First the amount of interest paid on a mortgages drops each year as the balance is reduced. Let's say Sally will pay $8,500 in interest in 2018. She will likely have a similar amount of other deductions. So at the end of the year she has $10,700 in deductions which is now less than the new standard deduction of $12,000. The good news is, Sally will get a larger deduction and save the extra expenses of having to file the schedule A. Her tax guy is not happy, but Sally is. But now for many the extra bonus value of home ownership that was an effective tax break, has been eliminated for those with smaller mortgages.

This could have a net effect of slowing down some of the pressure on entry level homes and first time home buyers. Of course the idea of home ownership should not revolve around tax deductions, but rather the idea of owning real property, gaining equity by reducing the balance on the loan and enjoying appreciation in price over time. These are really the hallmarks of home ownership. It's all about the equity asset and the lack of a landlord that can kick you out or raise your rent.

Over all the new tax system will be a bonus, but it could lead to some minor softening mostly near the bottom of the market. Frankly the bottom needs a little price relief anyway. 2018 is looking good.

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