How tax-re­form changes can af­fect you if you own a home

USA TODAY US Edition - - MONEY - Russ Wiles You can reach Russ Wiles at russ.wiles@ari­zonare­pub­lic.com.

The na­tion’s home­own­er­ship rate re­cently re­cently rose on an an­nual ba­sis for the first time in what seems like for­ever. If this trend con­tin­ues, it will be swim­ming up­stream against some of the changes brought about by in­come-tax re­form.

Many fac­tors af­fect home­own­er­ship. They in­clude pride, sta­bil­ity of lo­ca­tion and rel­a­tively pre­dictable fi­nan­cial obli­ga­tions — mort­gage pay­ments re­main con­stant over the life of a fixed-rate loan, the most com­mon va­ri­ety — un­like rents, which tend to in­crease over time.

That said, taxes play an im­por­tant role and could slightly erode the ar­gu­ment in fa­vor of own­er­ship, ac­cord­ing to a re­cent pa­per by the Ur­ban In­sti­tute. Re­searchers Lau­rie Good­man and Ed­ward Gold­ing ex­am­ined the own­er­ship vs. rent­ing ques­tion un­der the new tax rules that, for the most part, kicked in at the start of 2018. They looked at the sit­u­a­tion for four hy­po­thet­i­cal fam­i­lies earn­ing dif­fer­ent in­comes un­der var­i­ous as­sump­tions. Those as­sump­tions in­cluded mak­ing a down pay­ment equal to 20% of a home’s value, tak­ing out a mort­gage with an in­ter­est rate of 4% and en­joy­ing an­nual hous­ing ap­pre­ci­a­tion of

3%.

The new tax law caps in­come de­duc­tions on large mort­gages (those above $750,000 in debt, taken out after Dec. 15, 2017) for peo­ple who item­ize. It also lim­its to­tal de­duc­tions of state and lo­cal taxes, in­clud­ing prop­erty taxes, for peo­ple who item­ize at

$10,000 an­nu­ally. Ei­ther or both fac­tors could hurt home­own­ers from a tax stand­point, es­pe­cially those with high in­comes and large loans.

“While most tax­pay­ers will pay lower taxes, the in­creased stan­dard de­duc­tion means fewer tax­pay­ers will item­ize,” the re­searchers wrote. “The re­duc­tion in tax rates also sug­gests less of a ben­e­fit for those who do item­ize.”

The net re­sult: Rent­ing be­comes a bit more at­trac­tive on bal­ance.

Still, the re­searchers don’t ex­pect peo­ple to for­sake home­own­er­ship to rent if they can af­ford to do both, ex­cept at the mar­gin.

The na­tion’s home­own­er­ship rate ended 2017 at 64.2%, con­tin­u­ing a mod­est recovery from the cycli­cal low of 62.9% in 2016. But it’s still well be­low the peak rate of 69.2% in 2004.

Home-eq­uity con­fu­sion: Tax re­form also cur­tailed a key ben­e­fit of home-eq­uity loans — the abil­ity to deduct in­ter­est on loans taken out start­ing this year — but plenty of Amer­i­cans don’t seem to re­al­ize this. Just 4% of 1,000 re­spon­dents in a sur­vey con­ducted in late Jan­uary by fi­nan­cial web­site LendEDU ac­cu­rately replied this ben­e­fit has been cur­tailed. Onethird of re­spon­dents in­cor­rectly thought the tax ben­e­fits on home-eq­uity loans im­proved.

These loans use a home as se­cu­rity or col­lat­eral and are fairly pop­u­lar, in part be­cause they fea­ture lower in­ter­est rates than you might pay on other types of loans, es­pe­cially credit-card bal­ances. In fact, home-eq­uity loans of­ten are used to con­sol­i­date other types of higher-in­ter­est debt. Tax-de­ductible in­ter­est on home-eq­uity debt was an­other ben­e­fit, at least through last year.

Ac­tu­ally, new rules on home-eq­uity loans are a bit more com­pli­cated than they seem. While in­ter­est no longer is de­ductible if the pro­ceeds are used to con­sol­i­date debts or for other non­hous­ing rea­sons, it can be de­ducted if the money is used to im­prove a home sub­stan­tially, the Na­tional As­so­ci­a­tion of Real­tors said.

The more things change ... : One rule left un­changed per­tains to cap­i­tal gains. The leg­is­la­tion re­tained the abil­ity of home­own­ers to ex­clude a por­tion of their cap­i­tal gains if they live in their res­i­dences for at least two of the five years prior to sale. A pro­posal would have length­ened that to five in eight, re­quir­ing longer stays for home­own­ers if they hoped to ex­clude taxes on hous­ing prof­its. Up to $250,000 in gains can be ex­cluded for in­di­vid­u­als, $500,000 for mar­ried cou­ples fil­ing jointly.

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