01 Jan After tax plan, should I buy a home?

Q. I know there are changes to deductions for mortgage interest and property taxes, and I was planning to buy a home in 2018. Now I’m not so sure. Is it still a good investment?
— Wanting to buy

A. The tax overhaul can have meaningful implications for prospective homeowners, particularly in high-tax states like New Jersey.

The legislation puts a $10,000 cap on the combined itemized deductions for state and local taxes, including property taxes, for both single and married couples.

“The deductions for state and local taxes are particularly beneficial to New Jersey residents that pay a significant amount in the way of state income taxes and property taxes,” said Charles Pawlik, a certified financial planner and chartered financial analyst with Beacon Trust in Morristown. “As you point out, another critical aspect of the legislation for homeowners is the limitation on the deductibility of mortgage interest compared to where it currently stands.”

Pawlik said under the Tax Cuts and Jobs Act, starting in 2018, homeowners would be able to deduct mortgage interest on a loan of up to $750,000, and taxpayers would have new limits on deducting interest on home equity loans.

That compares to the 2017 law which allowed homeowners to deduct interest payments on up to $1.1 million of debt, which includes both home acquisition debt of $1 million and home equity debt of $100,000, Pawlik said.

These changes do have the potential to impact home values to some degree, particularly in high-tax states like New Jersey, he said.

Pawlik said it’s understandable that these tax changes may give pause to prospective homeowners in determining whether it makes sense to move forward with buying a home, particularly for purchases of expensive properties.

“The potential impact will depend on your overall personal income tax situation, the purchase price and consequent mortgage amount you are considering, and the level of real estate taxes for the property,” he said.

Pawlik notes it’s important to know that the individual tax law changes that are put into place through this legislation are set to “sunset,” or lapse, after the year 2025. And, he said, some of the key drivers for the overall residential real estate market such as a strong economy, low levels of unemployment and relatively low levels of interest rates can support the real estate market at a national level next year, albeit with potential price pressures on homes in high-tax states such as New Jersey.

Considering the tax and overall investment aspect of a home purchase is certainly important, but it’s also important to consider your personal lifestyle goals and whether or not you see yourself staying in the home for the long-term.

“General considerations such as the ability to put a call in to a landlord for maintenance requests as a renter vs. being responsible for the maintenance/upkeep of a home, as well as your personal circumstances and ability to view a home purchase as a long-term prospect, should ideally be significant components in your overall decision-making process,” Pawlik said.

If you don’t see yourself staying in the same area or same home for the long-term, closing costs for the purchase and sale of the home and the costs for maintenance/upkeep can be significant if incurred over a short period of time, and it can meaningfully cut into any equity you accrue in the home in the short-term, Pawlik said.

But on the other hand, he said, if you are considering the purchase of a home in order to put down roots in a particular community and you plan on building equity over the long-term, then a home purchase may make a lot of sense despite any changes to the tax advantages of homeownership.

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This post was first published in January 2018.