For many Americans, their home makes up a substantial portion of their net worth. The US tax code has long extended this value beyond mere market value, offering federal tax deductions for a wide variety of home costs, including property taxes, mortgage interest, and home-based business use. NJ home owners have benefited from this, with the 4th highest average home values and the highest average property taxes in the nation. The combination of property taxes and mortgage interest alone have often meant tens of thousands of dollars in annual income deduction.
With the late December passage of The Tax Cuts and Job Act, home prices may be in jeopardy both now and in the future. Among the material federal tax changes in this law is the reduction and removal of tax-deductibility of property taxes and home mortgage interest.
The law’s two most salient changes for homeowners:
MORTGAGE INTEREST DEDUCTION
Homeowners previously could deduct interest payments of up to $1.1 million of debt. The new law would allow homeowners to deduct $750,000 on a new mortgage.
STATE AND LOCAL TAXES
Homeowners previously could deduct state income taxes and property taxes. The new law would allow them to deduct up to a total of $10,000 in state and local taxes.
Higher value homes in New Jersey are likely to lose some of the tax benefit that came with ownership, which may put downward pressure on this segment of the housing market and cause a ripple effect. During the debate leading up to the passage of the new tax law, Moody’s Analytics projected house values in New Jersey to fall as much as 10%, largely due to this proposed tax change.
What can current owners do to manage this potential change?
- Hold on to your current mortgage – loans completed prior to January 1st, 2018 are grandfathered into the higher cap of $1,000,000 mortgages (+$100,000 in home equity loans). Refinancing or moving and opening a new mortgage would automatically move the qualified amount down to $750,000
- Look for “Comps”, and consider reassessment – if your home has not been assessed by the local tax office recently, you may be able to reduce your property taxes by petitioning a lower assessment. See our previous article on this subject.
- Take advantage – if the prices do slide, we are likely to see buying opportunities. The best way is to be prepared for this. Make sure your credit score is excellent, know what you want, and have a plan to move quickly if that right home becomes available.
Your home’s best value is still the roof over your head, but it is not always the best investment. However, there are ways to maximize that value, if you plan accordingly. Be smart about what you own, and make sure what you own fits with your overall plan.
Concerned about your plan?
Please do not hesitate to contact your AEPG® Financial Life Planner.
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