Most directly, the law reduces how much mortgage debt will benefit from tax-deductible interest payments; that number was previously $1 million and is now $750,000. Also, property taxes previously had no limits in being deductible against federal income tax, but now the deduction of property and other state and local taxes is capped at $10,000.
Both provisions will most affect upper- and upper-middle-income families in states with relatively high housing prices and high state and local taxes: Think Massachusetts, Connecticut, New York, New Jersey, Maryland and California.
For example, a married couple in Connecticut with a $300,000 annual income aiming to borrow $1 million toward a $1.2 million house would be able to deduct about $33,000 in mortgage interest in the first year of their loan, compared with about $44,000 under the previous law. Because they would be in the 24 percent federal marginal tax bracket, buying that house would cost them about $2,650 more in the first year of the mortgage after taxes than under previous law.
Moreover, that family’s state income tax obligations would push them over the $10,000 deductibility limit on their own, meaning the family would effectively lose the ability to deduct property taxes of around $22,000 a year, depending on the jurisdiction. That represents another reduction of this family’s tax advantage from homeownership by about $5,000 a year.
(Our hypothetical family may not be losing out as much as those numbers suggest because they would have faced the alternative minimum tax under the old tax system — evidence of just how complex these calculations can be.)
Even people whose mortgages are well below $750,000, or who are in lower-tax states, may find the tax law could shift the incentives for buying compared with renting. The new law roughly doubles the standard deduction that all households can take, to $24,000 for a married couple, which means that more households will find that they get no net tax savings from taking on a mortgage. They are better off just taking the larger standard deduction whether they buy or rent.
Over all, Moody’s Analytics estimates that the tax law will reduce home transaction prices by 4 percent, a number that reflects both the direct impact of tax changes and higher interest rates caused by larger deficits.