Tax Reform Promises Mixed Impact on Housing Sector
The Tax Cuts and Jobs Act (“TCJA”) was signed into law on December 22, 2017. This sweeping tax reform is the most monumental tax change in 30 years and will have an impact on the single family and multifamily housing markets. The TCJA widens the individual tax brackets while lowering the top tax bracket from 39.6 percent to 37 percent and maintaining the bottom tax rate at 10 percent.
Pre-TCJA, taxpayers could claim a personal exemption of $4,050 for themselves, their spouse and each dependent. The TCJA suspends all personal exemptions. The standard deduction is increased from $12,000 to $24,000 for families, and the child tax credit is increased from $1,000 to $2,000.
Under prior law, homeowners could deduct mortgage interest up to $1 million of home mortgage indebtedness and $100,000 of home equity line of credit. The TCJA limits the mortgage interest deduction on mortgages secured after December 15, 2017 to interest incurred on only $750,000 of indebtedness. Debt incurred on or before December 15, 2017 is grandfathered. Any refinancing of grandfathered debt must not exceed the lower of $1 million or the amount of the existing grandfathered debt. State and local taxes (SALT) such as individual income, property and sales and use taxes are limited to a combined deduction of $10,000 on federal income tax returns.
Previously the deduction was only limited by the alternative minimum tax (AMT), which remains in effect with higher minimum thresholds. The SALT deduction historically allowed individuals to itemize deductions, especially those in high tax states such as New York, New Jersey, California, Connecticut and Illinois. The lower individual rate brackets, increase in the standard deduction and doubled child tax credits will not be enough to offset the SALT limitation in these high tax states.