How does the new tax plan affect first time home buyers? What should they be taking into consideration as they plan to buy a new home? Does it still make sense to buy instead of renting?

The “Tax Cuts and Jobs Act” will mean lower taxes for most Americans because of lower tax brackets that are wider than the current tax brackets, i.e., more income is taxed at the lower bracket before income is taxed at the next higher bracket. Additionally, the Standard Deduction has been doubled ($24,000 for Married Taxpayers filing jointly & $12,000 for Single Taxpayers). This is important to note because we believe too much focus is being placed on lower deductions and not enough emphasis is being placed on the lower tax rates.

Two specific changes to real estate taxation that might be viewed as negatives are the changes to the Mortgage Interest Deduction and the State & Local Tax deduction. We want to emphasize that these changes might be negatives but it depends on your situation and your taxation under the current tax law.

The reduction in the amount of mortgage debt that can be treated as qualified and therefore allowing the taxpayer to deduct the interest on such debt has been reduced from $1 Million to $750K. This is combined mortgage debt, therefore if you are considering buying a unit in a cooperative building, it includes your mortgage on your unit, as well as your share of the mortgage on the building. For example, if your unit costs $1Million and you put 25% down and take out a $750K mortgage, you would be only able to deduct the interest on the $750K mortgage; you would not be able to deduct the interest on your share of the buildings’ mortgage. The new limit applies to mortgage debt incurred after 12/14/17. Older loans up to the old loan amount get the $1 Million Cap.

With respect to the State and Local tax deduction being capped at $10,000 (under current law, there is no limit), this may be a no change item. This is because if you are subject to the Alternative Minimum Tax (check line #45 on page #2 of your 2016 Form #1040), you did not receive any benefit from this tax deduction in the past because State and Local Taxes are not deductible in the AMT calculation and you probably will not receive any benefit under the new law. For those taxpayers not subject to the AMT, the cap of State and Local Taxes including Real Estate Taxes at $10K will mean lower deductions but due to the lower tax rates may still result in lower income taxes. This should be analyzed by a tax professional to determine the effect on your 2018 taxes.

Home ownership is still a better alternative to renting for the same reason that it always has been; with a rental you receive no tax deductions and no buildup of equity. With owning a piece of real estate and using it as your primary residence, you still will receive substantial tax benefits even if they will be lower than under previous law, you will receive the buildup in equity, and, last but not least, when you are ready to sell, you will receive a tax benefit that survived the current changes, which is an exemption from tax on either $500K for married filing jointly or $250K for single taxpayers of the capital gains on the sale (as long as the property was used as your primary residence for 2 of the last 5 years).

Content provided by John E. Johansen, CPA & Managing Director at TaxFirst. He can be reached at or 212-335-2136.