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.