The new tax law raises issues about the housing market in high-tax states — issues that your clients may want to consider. Should they buy a new home or rent? Consider selling their current home sooner or later?
The law’s limits on deductions for mortgage interest and state and local taxes coupled with the almost doubling of the standard deduction, decline in marginal tax rates and higher thresholds for income subject to the alternative minimum tax can affect “the after-tax cost of mortgage interest and property taxes,” according to a new report from the Federal Reserve Bank of New York.
Those effects, in turn, can ultimately affect decisions about buying or renting a home and when to sell for residents in high-tax states, according to the report, “How Will the New Tax Law Affect Homeowners in High Tax States? It Depends.”
New York Fed researchers looked at the overall federal tax liability and marginal after-tax cost of mortgage interest and property taxes for a range of hypothetical recent homebuyers in a high-tax state, namely New York, using the old tax code and new tax code. Household income and home values were divided into nine groups, ranging from $50,000 to $1 million for income and $163,000 to $3.25 million for home values.
Researchers made the following assumptions:
- Home purchase price was 3.25 times the couple’s adjusted gross income
- Mortgage was 30-year fixed with a 4.5% interest rate and equal to 80% of the home price
- Property taxes equaled 3% of the home’s value
- Property insurance equaled 0.4% of the home’s value
- Monthly payments for mortgage principle and interest, property taxes and insurance equaled 27% of the couple’s AGI
They did not factor in other changes in the new tax law such as the expanded child tax credit.