Monthly Archives: December 2018

How the New Tax Law Affects Homeowners

It’s been a full year since the tax reform bill was passed by Congress and it is now starting to have impacts across the country, especially on homeowners.

While many homeowners, homebuyers and real estate investors will see benefits from this legislation, some markets may still see diminished tax benefits and adverse impacts to the real estate market.

While final data for 2018 is still not available, the National Association of REALTORS® (NAR) projected slower growth in home prices – between 1 and 3 percent – for the year. The continued growth is likely from the demand still being higher than the supply nationally, but in some local markets, specifically those in high cost, higher tax areas, price declines are expected because of restriction on mortgage interest and state and local taxes that were part of the new legislation.

“Most people aren’t even aware yet that this tax change took place, either because they haven’t adjusted their withholding or they haven’t filed a tax return yet.”

“Most people aren’t even aware yet that this tax change took place, either because they haven’t adjusted their withholding or they haven’t filed a tax return yet,” said Evan Liddiard, CPA, Director of Tax Policy for NAR. “If you wait until after April 15, 2019, it will change because it will give people time to look at what the effect will be.”

But they’re about to.

The new legislation reduces the limit on deductible mortgage debt to $750,000 for new loans taken out after Dec. 14, 2017. Current loans of up to $1 million are grandfathered and are not subject to the new $750,000 cap. Neither limit is indexed for inflation.

Homeowners may refinance mortgage debts existing on the aforementioned date up to $1 million and still deduct the interest, as long as the new loan does not exceed the amount of the mortgage being refinanced.

The legislation also repeals the deduction for interest paid on home equity debt through the end of 2025. Interest is still deductible on home equity loans or second mortgages if the proceeds are used to substantially improve the residence.

Interest remains deductible on second homes, but it is subject to the limits listed above.

Also, part of the reform legislation caps an itemized deduction at $10,000 for the total of state and local property taxes and income or sales taxes. This $10,000 limit, also known as a SALT cap, applies for both single and married filers and is not indexed for inflation.

A higher standard deduction of $12,000 for single individuals and $24,000 for joint returns was also part of the new tax law. Nearly doubling the previous standard deduction, the effect of the increase is that the value of the mortgage interest and property tax deductions as tax incentives for homeownership has been reduced.

Estimates indicate that between 12-13% of filers will now be eligible to claim these deductions by itemizing – down from 31% in 2017 – meaning there will be no tax differential between renting and owning for nearly 90% of taxpayers.

Impact on Homeowners, Home Buyers and Sellers

So, how would this affect you as a homeowner or a potential homebuyer?

“For most of the year we had high inventory and prices were going up and it’s true that some areas of the country have a lot more of this happening, but it’s also true that every state and every city will have some homes affected,” Liddiard said. “It may not be as high a factor everywhere, but go to New Jersey and almost every middle-income-and-up home is likely to have a problem. Whereas if you go to somewhere like Tennessee or Utah, it’s only going to be the most exclusive neighborhoods that may have property taxes and income taxes that exceed $10,000.

“When I was in Tennessee earlier this year, the folks I talked with didn’t think the $10,000 cap was going to be a problem at all. Their property taxes are low and there isn’t any income tax at all, so hardly anybody is going to be affected – likely only the wealthiest 10 percent. But in New Jersey or New York, all they want to talk about is this so-called SALT cap.”

Consider this example that NAR provided:

A single person we’ll call Barbara making $58,000 annually and who rents is looking to buy a home for the first time. Barbara pays state income tax of $2,900 and makes charitable contributions of $2,088, but the total of these is lower than the standard deduction, so the standard deduction is claimed.

But had Barbara purchased a home costing $205,000, using a 30-year fixed rate mortgage at 4% interest, and putting down 3.5%, she would pay first-year mortgage interest totaling $7,856 and property taxes of $2,050, adding to her itemized deductions.

As a homeowner, Barbara could itemize deductions under both the old and new law, because they total more than the standard deduction. But the old tax rules rewarded her for owning a home vs. renting one by lowering her tax bill by $2,100. The new rules still give her a tax subsidy for owning, but the amount is reduced to just $637, or $53 per month.

Another way of looking at it is that as a renter, Barbara would receive a tax cut from the new changes of almost $1,500. But had she bought the home, her taxes would actually go up by $30.

In other words, before the reform, Barbara would have had a strong tax incentive to become a homeowner. While that incentive still exits, it is only a small portion of what it used to be and it is not very compelling.

Still, Liddiard thinks a single person looking to buy a home is better off than a married couple because the cost of purchasing a home for a single person is much higher per capita than for a couple.

“Single people are going to find it easier to get tax subsidies to buy a home than married folks,” he said. “A couple can live in a house the same size as a single person. Yet, a married couple has a $24,000 standard deduction and would have to have that much in itemized deductions to begin to get the tax benefit, whereas a single person would only have a $12,000 threshold and they can exceed this number a lot easier with the property tax and with their mortgage interest than someone who is married can exceed $24,000.”

An Unexpected Consequence

Millennials are trying to find loopholes to this, and one of them is to skip out on tying the knot.

“People just aren’t marrying as much anymore,” Liddiard said. “They may still live together but they aren’t getting married. Now you have two single people, earning the same money as a married couple, but they’re each buying half a house. They each get a $750,000 limit and they each get a $10,000 cap and they each have only a $12,000 standard deduction threshold.

“So, they can buy the house, they can each pay for half the house, be co-owners of the house and still get big tax benefits, whereas if they were actually married they wouldn’t get nearly as much or none at all. The new law created a huge marriage penalty and discourages people from marrying. I don’t think that was intended, but that’s the effect of it.”

In the end, the real impact of this tax reform won’t be felt by homeowners for several years, but without additional reforms, it’s going to put a real financial squeeze on most homeowners in the not-too-distant future.

“It depends on how far ahead you are looking, but the longer ahead you look the more negative the impact,” Liddiard said. “Keep in mind the SALT cap and the $750,000 limit are not indexed for inflation, so every year they are going to pinch a little bit more. It doesn’t look like much if you just look at the next few years, but look ahead 15-20-25 years, if Congress doesn’t change it again – and it took 31 years to change it this time – most of the country is going to be severely impacted in a negative way.

“No longer can a married couple with two kids making $65,000 a year buy a house worth $130,000 and get help from the tax code. Under the old law, they could get about a $100 per month subsidy from the tax code. No longer is that going to be the case. The 12-13% who are going to get a tax benefit from owning a home are largely going to be folks in the top 10 percent of earners who have a large mortgage, who pay a lot in state and local taxes and max out at $10,000 and also make charitable contributions. Those will be the ones who have enough itemized deductions to see the tax law incentivizing home ownership.”


Congress Passes Flood Insurance Extension

Congress late on Friday, December 21, passed an extension of the National Flood Insurance Program, avoiding a lapse that would have begun at midnight. The President signed the bill.

The bill, the “National Flood Insurance Program Extension Act,” authorizes the Federal Emergency Management Agency (FEMA) to enter into new contracts for flood insurance and borrow from the Treasury up to specified amounts through May 31, 2019.

On December 26, FEMA issued an opinion disallowing new or renewal flood insurance policies during the partial shutdown of the federal government, but later reversed that decision following concerns that tens of thousands of pending home sales across the country would be in jeopardy.

“FEMA and the Administration deserve credit for hearing our concerns and acting swiftly to address them,” says National Association of REALTORS® President John Smaby.

“This new decision means thousands of home sale transactions in communities across the country can go forward without interruption, as Congress intended when it renewed the flood insurance program earlier this week. Our research has shown that 40,000 home sales are lost every month that flood insurance is not available.”

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Maine’s Fast Growing Housing Concerns

The senior population in Maine is among the fastest growing in the United States. The Bipartisan Policy Center’s Senior Health and Housing Task Force reported that after Florida, Maine is home to the highest percentage of residents over age 65. This number will soon rise, since the average age of a Maine resident is currently 43.5.

Columnist George Mitchell, of CentralMaine.com, explains how the increasing senior population is translating into a housing issue for the state. “While most older adults in the state own their homes, incomes decline significantly as people age, a situation that will affect the thousands of seniors who still hold mortgages and pay property taxes.”

Mitchell shares that a recent AARP survey found that “an overwhelming majority of older adults will seek to “age in place” in their own homes and communities. Yet most homes lack the design features like “no-step” entrances, extra-wide hallways and doors and accessible switches and outlets that can help ensure safe and independent living by seniors.”

The Maine Association of REALTORS® (MAR) and its members often work with senior clients, and are aware of the housing challenges Mitchell wrote about in his article. Suzanne Guild, MAR’s CEO, said, “As REALTORS®, as neighbors, we want to make sure that the seniors in our state have safe, affordable housing. As an emerging policy issue, it’s important that we begin partnering with housing and service providers to have a seat at the table for the development of solutions.”

MAR joined forces with the Maine Council on Aging and the State Housing Authority to host a conference called “Housing Solutions for Maine’s New Age” in May of 2018. The event provided an opportunity to identify solutions and greater housing opportunities for Maine seniors. The conference attendees came prepared to create an actionable, long-range plan that would address the changing housing needs of aging Mainers.

Discussions centered around solutions that would honor the wishes of seniors who wanted to remain in their homes as they aged. These included finding ways to provide repairs and modifications as well as developing Accessory Dwelling Units (ADUs). Emerging design trends like tiny homes and the development of “scattered site” development of affordable housing were also brought to light.

“The conference brought together the knowledge of more than 100 housing professionals. We were able to identify immediate and long term solutions that will help our senior population continue to enjoy the benefits of home ownership.”

Houston Home Prices Rise in November

For the latest sales information on single-family homes and condos in Houston, see these three infographics below.

Click on the arrows below the infographics for more statistics from the association’s annual housing market report.

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Why you should support Home Inspector Licensing in Ohio

Updated (December 4, 2018): The Ohio House of Representative passed a bill by an overwhelming 87-7 majority that would would require 80 hours of education and complete peer review for new home inspectors in Ohio. The bill has now moved to the State Senate.

Home inspection

There are several critical phases when it comes time to buy or sell a home.

Arguably though, the most important time for buyers and sellers alike is during home inspections.

What an inspector finds can make or break a potential sale of a property. So, there is a lot of hand-wringing on both sides.

However, what if the person doing the home inspection isn’t suited to do the job? What if the inspector misses something major, or identifies a problem that really doesn’t exist?

This can and does happen – and it shouldn’t.

But Ohio is one a few remaining states that doesn’t regulate home inspectors. They aren’t required to be licensed, or at the very least be registered in the state.

This puts the entire burden of finding a reliable and trustworthy home inspector on the buyer, and leaves everyone involved in the potential transaction vulnerable to having it thwarted by someone who probably shouldn’t be inspecting properties in the first place.

That has never been closer to changing though than it is right now.

Last summer, the Ohio House passed a bill by an overwhelming 74-6 majority that would require all home inspectors in the state to be licensed. That bill has now moved to the Senate, where it is under consideration before it can be put on the Governor’s desk to be signed into law.

This legislation would regulate home inspections and impose stiff penalties on unlicensed inspectors, bringing peace of mind to buyers and sellers as they know that a licensed professional is handling the inspection for them.

If passed and approved by the Governor, the new legislation would require 80 hours of education and complete peer review for new inspectors. For current inspectors, it would require  a path to licensure that would mean passing the National Home Inspector Examination, their own peer review, and three consecutive years of consistent home inspecting.

Additionally, it calls for:

  • Written contracts between the inspector and client
  • Real estate agents who recommend an inspector to also provide at least three names of licensed inspectors
  • Inspectors to deliver a written report to clients

“The home inspection process may be the last activity related to a residential real estate transaction that remains completely unregulated,” said 2018 Ohio Association of REALTORS® president Pete Kopf to the Ohio House Economic Development, Commerce and Labor Committee last winter. “The home inspection report is oftentimes the final factor in a consumer’s decision to purchase a property.

“Licensing home inspectors will provide consumers with a basic level of protection. More importantly, home buyers can have confidence the inspection that they will base their decision to invest their life’s saving on a property is a sound one.”

Kopf is a licensed REALTOR® in both Ohio and Kentucky. He outlined for the Committee that Kentucky enacted a Home Inspector Licensure statute in 2004.

The Kentucky Home Inspector Licensing Law requires home inspectors to be licensed and defines the requirements of licensure.

An inspector must be at least 18 years old, have a high school diploma or GED equivalent, complete a board-approved training program, pass an examination approved by the board, and submit a properly completed application.

“My experience since the enactment of this statute has been the clarity in seeing how the Kentucky Licensing law brings a high level of consistency to home inspection reporting and ensures the quality of each inspector by setting minimum standards,” Kopf said. “The Ohio consumer is unaware that home inspectors are not licensed in our state. Therefore, when an Ohio home inspector does not perform well, the buyer and seller are both harmed.

“It is my overall opinion, that the Kentucky Home Inspector licensing law better protects the purchaser and seller within the real estate transaction which is the most important part of this legislation.”

Houston Home Prices Increase

For the latest sales information on single-family homes and condos in Houston, see these three infographics below.

Click on the arrows below the infographics for more statistics from the association’s annual housing market report.

« 1 of 3 »