I’m a mortgage guy. I’m not a tax guy. However, the proposed tax reform has such significant relevance to an individual’s mortgage and real estate taxes that I feel compelled to raise this topic with the hope you will speak with your tax advisor to see if there are any actions you should take before the end of the year.
Over the coming weeks and months there will likely be a great deal written about tax reform, who it helps, who it harms and how those people might minimize the negative impact.
There are many moving parts to the various proposals and we really can’t effectively analyze the new law, especially since we don’t know what it is yet. Next year there could be many decisions we each must make as we understand the changes and evaluate how to use the new law to our individual benefit.
However, there are several actions you may want to consider in December that could reduce the impact of the changes. But please remember, I’m a mortgage guy. Not a tax guy. Be sure to speak with your tax advisor before taking any action.
Current law allows for deduction of mortgage interest on the first $1,000,000 of a home mortgage and $100,000 of a Home Equity Line. The current Senate proposal still allows the interest deduction on a mortgage up to a $1 million loan balance. However, the House plan allows for deduction only on the interest paid on the first $500,000. (There are other possible changes dealing with Home Equity lines, second homes, RVs, boats etc., but we will just focus on the mortgage interest on the primary home for now.)
Therefore, according to the House proposal, if you have a mortgage balance of $1,000,000, you will not be able to deduct the amount of interest paid on the balance higher than $500,000. (I am told this is for new purchases. Homes purchased before 2018 would be grandfathered in, which means you would be able to still deduct up to $1,000,000 if your home is purchased in 2017. I am not certain this is accurate and it is likely still being discussed. Again, please consult a tax advisor but there may be a benefit to closing on your purchase in 2017, if possible.)
Another possible impact relates to real estate taxes paid. Both plans limit real estate tax deductibility to $10,000. Therefore if you pay $25,000 of real estate taxes, while you can deduct the first $10,000, you will not be able to deduct $15,000 of that amount.
The most obvious impact is that many people with high real estate taxes and mortgages over $500,000 may see their federal income tax obligations increase due to the loss of significant deductions. The secondary impact could be more significant. According to Moodys Analytics, real estate values in the affected areas like New York, New Jersey and California could see a decrease in real estate values of 10 percent or more. As renters consider the option of rent versus buy, they typically include in the calculation the ability to deduct interest and taxes. As the formula changes, many renters who planned to buy may take a wait-and-see attitude. While many people may think this will only impact the million dollar houses, the problem is as the high end drops the lower tier typically follows suit.
So what can we do now to help alleviate some of the lost benefit?
If you owe real estate taxes for 2017 but that are payable in 2018, if you pay them in December, you should be able to deduct them in 2017. Some tax advisors I have spoken with suggest if the taxes can be prepaid, you can deduct them, even if they are 2018 taxes. Others disagree. Please consult your advisor.
The main point is, taxes you may not be able to deduct at all in 2018, you may be able to deduct now, which benefits you in three ways. (1) You can deduct it in 2017 and gain the benefit sooner. (2) You may be in a higher bracket in 2017 since rates may drop so the deduction this year may have more benefit. (3) The deduction you take from this prepayment in 2017 may not be available to you in 2018.
If you are going to pay taxes yourself, you may need to take certain actions if you are escrowing your tax payment through the bank. If you are currently escrowing your tax payments you may want to have the tax escrow discontinued to make sure you and the bank aren’t paying the same tax. Please contact your servicing department to make that arrangement soon to avoid a problem. In closing the escrow account, you will also receive the escrow funds held by the bank, which could amount to five or six months of tax payments. This will help alleviate the money you laid out in December pre-paying the taxes.
Another option would be to pay the January mortgage payment in December. You should be able to apply the interest payment per 2017 rules and deduct that interest in 2017. This is just another way to secure the same three benefits as mentioned above.
The new law is still being revised and we can’t know at this time what the end result will be. It’s important to stay engaged so that when the final law is passed you can see how it impacts you and what actions you can take to your benefit. Again, please be sure to speak with your tax advisor, who understands your personal situation. The AMT could pertain to you and make these strategies unhelpful. Articles like this are meant to raise awareness and encourage the reader to seek advice. After all, I’m a mortgage guy.
By David Siegel
David Siegel is a home lending officer with Citibank in the Englewood and Clifton offices. He can be reached at 917-270-0593 or [email protected].
