The summer home buying season in 2018 is in full swing, with rising prices and interest rates encouraging many buyers to get the deal done before the cost of buying a home rises even further.
But the landscape for buying a home from a tax deduction standpoint has changed a good deal since last year. Congress has reduced some of the tax incentives to buy and keep a home of your own. But don’t worry: For many Americans, it is still better to buy a home than rent over the long haul.
You Should Know What Home Buyer Tax Deductions Are Available to You Before You Purchase a House.
The new tax laws passed by Congress have doubled the standard deduction to $24,000 for married couples, and has capped state and local tax deductions to $10,000. These changes will limit the tax deduction incentives to buy a home rather than renting. Zillow has estimated that homeowners who are taking tax deductions and listing mortgage interest as a deduction will drop from 44% to 14%. You also cannot write off the interest on many home equity loans and lines of credit today, unless you are using it for home improvements. Further, you only can deduct mortgage interest on debt on a home from $750,000 and below.
These changes in tax laws have reduced the tax advantages of buying a home, but evidence continues to suggest that buying generally beats renting.
Economists believe the tax law changes will reduce the number of purchase offers enough to drop home prices by approximately 4% in some of the more expensive cities, but the data does not show this yet.
Tax law changes were laid out in December 2017, and we currently have resale pricing data available through February 2018. In the top 20 cities of the country, year over year price hikes were about the same or even higher than a year ago. This was especially the case in more expensive markets such as San Francisco, Los Angeles, San Diego and New York City.
The majority of home buyers have more disposable income to make their mortgage payments. In their weekly take home pay, a higher standard deduction provides them compensation for not taking property tax and interest deductions. And lower rates overall will actually increase the buying power of many taxpayers.
In hotter markets such as New York City, foreign buyers who often come in and pay cash to park wealth in the US, have played a major part in hiking prices. US personal income tax laws have little to do with this.
In June 2018, the Freddie Mac average for a fixed rate, 30-year mortgage is about 4.7%, which is up from the 4% range a year ago. For a $300k mortgage, this will add about $150 per month to your payments. But keep in mind that landlords are paying more to get loans for their apartment buildings and that affects rents.
How long you plan to stay in your home will also affect whether you want to buy or rent, regardless of the tax law changes. Closing costs, realtor fees and so forth raise the cost of owning a home, even if you can roll the costs into the mortgage.
For example, if you were to buy a home with a 30-year mortgage, 4.6% interest rate and a 20% down payment, if you occupied the home for at least four years, owning would still beat renting even if you cannot take the mortgage interest deduction anymore.
Families might decide to continue to rent and invest the down payment in stocks. From 2000 to 2017, equities measured by the Standard and Poor’s Index were up an average of 5.3% per year. But appreciation in homes in the top 20 markets in the last several years have shown approximately 6% increases each year.
There is also tougher zoning around major cities where the big employers are, and rising costs of materials and slower home building is making single family housing stock lower than in past times. As more young buyers are starting to get into the market, it is a good bet that continued home appreciation with continue to beat the stock market average. This is another argument for buying a home over renting, even without the previous tax incentives as enticing. Homeowners also have their fully equity working for them and not just the down payment.
While it is true you are not able to write off as many expenses as before as a home owner, there are still major advantages to buying over renting, especially in a growing economy with rising home prices and interest rates, and higher demand for homes. It is expected that home prices and rates will continue to rise, making home owners somewhat sitting in the cat bird’s seat, especially if they bought several years ago when rates and prices where much lower.
References: https://www.marketwatch.com/story/even-with-mortgage-rates-up-buying-instead-of-renting-makes-sense-for-many-2018-05-29 and https://www.whitehouse.gov/sites/whitehouse.gov/files/images/Effects%20of%20Changes%20to%20the%20Mortgage%20Interest%20Deduction%20FINAL.pdf