Tax Benefits To Being A Homeowner (2018 And Moving Forward!)
I was looking for information on the tax benefit of being a home owner and came across an article about the tax benefits before the recent tax changes that are going into effect for 2018 and beyond. I was looking for the tax laws in place for 2018 but also realize many people are still filing their 2017 taxes. They are due by April 16, 2018. I decided it would be good to remind myself what the 2017 tax laws were and wrote about them last week. This week I am looking at what has changed going forward from 2018. So let’s talk taxes
Primary Residence Ownership Cost
Like last week, let’s assume you are a homeowner that bought a house for $250,000 dollars, and you paid 20% down and qualified for 30 yr loan with financing at 4.25%. This means you have a loan of $200,000. Your monthly payment to the bank would be $938.88. This would be a yearly payment of $11,806.56 of which $3371.72 is used to pay the principle down and $8434.84 is to pay interest on the loan. These numbers will change slightly as the years go by and you owe less on your house.
In addition to the monthly mortgage, a homeowner has to pay yearly insurance and property taxes. Let’s assume the yearly insurance $1200.00. Your yearly taxes are $6000.00. A summary of the cost would be as follows:
Yearly Mortgage Principle: $3371.72
Yearly Mortgage Interest: $8434.84
Yearly Property Tax: $6000.00
Yearly Insurance: $1200.00
Total yearly cost: $19006.56
Note: Sometimes you will hear the term P.I.T.I when people are talking about the cost of home ownership. The just means Principle, Interest, Tax (property), Insurance.
Federal Income Tax Code Changes
Utilizing the tax laws that are in place for 2018, the Mortgage Interest, and Property Taxes are still tax deductible. However, for 2018 the amount you paid on State Income taxes will affect the amount of property tax you can deduct. The tax code has been changed such that the amount you can deduct on the Federal Taxes is a maximum $10,000 for the combination of state taxes and property taxes.
What does this mean? In the example we are using, the property tax is $6000. Therefore if your state income tax is over $4,000 dollars ($10,000 – $6,000), then the amount you can deduct will be subject to the new $10,000 maximum for State Income Tax and Property Tax limit.
Another change to the Federal Tax code also becomes significant. The amount of the standard deduction that you can take on the Federal Taxes has been raised from $12,000 to $24,000 dollars. This means that you get to take at least a $24,000 dollar tax deduction on your Federal taxes. You get to take this without itemizing your deductions for property taxes, mortgage interest, state income taxes, charitable contributions etc.
The next significant change in the tax code is the tax rate that you will be paying. The tax rate is used to calculate your tax on your adjustable gross income. The tax rates have been lowered for 2018 and beyond. The changes are outlined in the table below (married filing jointly tax rates).
| 2017 Rate | 2017 Bracket | 2018 Rate | 2018 Bracket | |
| 10% | $0 – $18,650 | 10% | $0 – $19,050 | |
| 15% | $18,650 – $75,900 | 12% | $19,050 – $77,400 | |
| 25% | $75,900 – $153,100 | 22% | $77,400 – $165,000 | |
| 28% | $153,100 – $233,350 | 24% | $165,000 – $315,000 | |
| 33% | $233,350 – 416,700 | 32% | $315,000 – $400,000 | |
| 35% | $416,700 – $470,700 | 35% | $400,000 – $600,000 | |
| 39.6% | $470,000 plus | 37% | $600,000 plus |
The table points out that all tax rates for all brackets has been lowered. In addition, the brackets for people making below $315,000 have been expanded. All of this is favorable to the tax payer.
Home Ownership Cost and Impact of Federal Income Taxes
Last week we used the example, of making $100,000 as reported on the W-2. Property taxes of $6,000 and Mortgage interest of $8,434. This week will add that the state Income tax is $5000 and that charitable contributions are $1000.
The first thing you need to do is to calculate the amount of deductions you will have. Therefore, property taxes of $6000 plus State income taxes of $5000 will add up to $11,000. Since the 2018 tax code has been changed to allow a maximum of $10,000 for the combination of state income tax and property tax, the amount of deduction you can take is $10,000. In 2017, you would have been allowed to take the full $11,000 deduction.
The rest of the deductions you can take still include the $8434.84 for Mortgage Interest and the $1000 for charitable contributions. When you add all of these deductions up, you get a total of $10,000 (state and property tax) plus $8434 mortgage interest plus $1000 charitable contributions. This equal $10,000 + $8434 + 1000 = $19434.
Now the new standard tax deduction of $24,000 comes into play. The taxpayer in this example would be wise not to itemize their tax deductions at $19434 and to take the standard tax deduction of $24,000.
What does this mean to the tax benefit of owning your own home. In this example, there would be no tax benefit. The taxpayer is better off taking the standard tax deduction. You get this regardless if you own your own home or not. Before discussing this more, let’s compare this example utilizing the 2017 and 2018 tax codes.
Impact of Tax Code Changes – example
| 2017 tax code | 2018 tax code | |
| Gross Income | $100,000 | $100,000 |
| Itemized deductions | ||
| · State Income taxes | $5000 | $5000 |
| · Property Tax | $6000 | $5000 (10,000 max of Sate & Property Tax) |
| · Mortgage Int | $8434 | $8434 |
| · Contributions | $1000 | $1000 |
| Total | $20,434 | $19,434 |
| New Std Deduction | $24,000 | |
| Taxable Income | $79,566 | $76,000 |
| Tax rate | 0.25 | 0.12 |
| Total Tax | $19891 | $9120 |
As you can see, the amount of taxes to be paid by the tax payer in this example is significantly different in 2018 as compared to 2017. The standard tax deduction increase, the tax rate decrease, and the tax bracket changes really make a big difference in this example. I need to point out that not all tax payers will see the impact of all three 2018 major tax code changes helping them lower their taxes. In addition, there are other changes in the 2018 tax code that will cause your taxes to either go up or down. You need to check your own tax situation.
Impact on Cost of Home Ownership
So how does this effect your overall cost of homeowner ship. In this example, there is no tax advantage of owning your own home. I believe this will be true of most taxpayers but each tax payer needs to check this for themselves. Since in this example and probably for most tax payers there is no tax advantage of home ownership. Therefore, the cost of homeownership may increase for the individual home owner.
Impact on Demand for Home Ownwership
However, there are many reasons that people buy homes. The ability to deduct your property taxes and mortgage interest was only one of them. The appreciation in the value of your home with time still applies. The sense of security you get when owning your home still applies. Being able to modify your own home vs a rental property to create the space you want still applies. It will be interesting to see how the demand for homeownership changes moving forward. I personally think it will not impact demand significantly.
One thing to consider is that today many people move more frequently than the previous generations did because of employment situations. If you do see needing to move frequently, then renting a home may be a preferred option. This will allow you to be mobile without cost of selling and buying homes. This trend will increase the demand for rental property.
Summary
In summary, the change in the tax code most likely will impact the cost of home ownership. The demand for home ownership may change a little but people buy homes for many reasons and still need to live somewhere. Other social demographics may impact the percentage of people owning homes versus renting homes.