With a sweeping new tax code taking hold for the 2018 fiscal year, homeowners and taxpayers of all kinds are wondering how they’ll be impacted. When it comes to owning a home, your tax situation will vary depending on where you live. Moreover, entire real estate markets may see shifts due to the new legislation. In essence, two tax code measures have the promise to affect Colorado homeowners and homebuyers:
The Standard Deduction Increase
The Mortgage Interest Deduction Cap
Will You Really Save With The Increased Standard Deduction?
Trump described the deduction increase as, “nearly doubling the standard deduction that most families take on their taxes”. The truth isn’t so simple. Yes, the standard deduction will almost double (from $6,350 to $12,700 for individuals and from $12,000 to $24,000 for couples) in 2018, but that doesn’t mean you're saving twice over on your taxes.
Personal exemptions are also being eliminated - to the tune of $8,100 for a couple. This essentially reduces the deduction to under $200 per person (much less impressive).
But the part of the measure that will truly impact homeowners is the lost incentive to own a home. The “doubled” standard deduction promises to streamline the tax filing process, by eliminating the need to itemize taxes. This will minimize financial incentives to own a home, as most large write-offs have (historically) been handed to homeowners. Basically, everyone will receive the same deduction - both renters and owners. Whether good or bad, come tax season, owning a home will save you less money as compared to your renting friends.
The end result is that federal taxes do not encourage homeownership as they did in the past. This change has the potential to stifle buying across the country and to impact the overall real estate landscape, especially in Metro Denver - where renters are already finding it difficult to bring themselves to buy a first home. Denver real estate could see an impactful change.
The New Mortgage Interest Deduction Cap Might Worsen Denver’s Listing Shortage
The new tax legislation lowers the mortgage interest deduction from mortgages of up to $1 million to mortgages of up to $750,000. However, existing mortgages will be grandfathered into the old system, allowing the deduction on mortgages up to the $1 million price point.
With Denver’s continually growing average home price tag, this component of the tax plan could impact the number of homeowners willing to list their current home for sale. In order to maintain their full tax deduction, some homeowners may choose to stay put.
Additionally, this measure could change the real estate market, as some buyers may attempt to stay below the $750,000 price point (when they would have purchased a pricier home before this legislation). Those who might consider "moving up", freeing their more affordable properties for first-time homebuyers, will likely think again. With starter homes already at a premium in Metro Denver and a listing shortage continuing to drive prices up, this could magnify the issue.
Though you may not see a huge change on your 2018 homeowners’ taxes, you may see a large impact on the Denver real estate market. We’ll certainly see meaningful impact in the most expensive cities in the country! And with Denver well on its way to becoming one of America’s premier metropolitan locations, The Mile High City could experience the same.