Rhinebeck Bank’s Tips & Tricks for Success

The recent passing of the tax reform bill has caused an incredible amount of scrutiny and opinion towards the effects it will have on home ownership. It is during times like these that we need to examine the facts of the new plan, and then reflect on the main benefit of home ownership and the reasons we buy a home.

Let’s start with the facts. In relation to real estate lending and home ownership, there are three main changes to the tax plan to consider:

1.    There is a $10,000 cap on state and local taxes- the new plan puts a cap on the amount of state and local taxes that can be deducted on your 2018 returns, affectionately referred to as “SALT”. This will have a detrimental effect on homeowners, especially for the greater percentage of households in the southern portion of the Hudson Valley.

2.    There is a reduced cap on the amount of mortgage debt that can be deducted- the interest deduction cap has been reduced from mortgage amounts of $1,000,000 to mortgage amounts of $750,000 and under. To add some texture to this change lets review some real data. If we assume that the minimum down payment on a non conforming (Jumbo) loan amount is 10%, then the minimum purchase price would be $833,333. In speaking with Sandy Tambone, Executive Director of the Mid Hudson Multiple Listing Service LLC, approximately 2% of homes sold in 2017 had sales prices at or higher than this amount. While I am sympathetic to the 2%, this change is not a market driver.

3.Deductibility of interest on home equity loans has been eliminated - while the new plan states that the home equity loan interest is no longer deductible, it does state that the interest from an equity loan used for “acquisition indebtedness” or “substantial improvement” to a home can still be deducted. This should mean an equity loan used specifically to purchase a home or to make upgrades and additions to current homes, however, there has been no guidance as to how you or your accountant is to document the original or subsequent use of a home equity loan in order to maintain this deduction.

These are the three hot buttons that have the real estate community talking, but let’s stop and discuss why we buy a home in the first place. Is it mainly for the tax break? No, although that was always a nice secondary benefit. The main reason we purchase a home is for equity and wealth creation. As we pay down our mortgage we are gaining equity. Yes, that can sometimes be temporarily offset by market conditions but as the saying goes, it is “time IN the market, not TIMING the market”. Purchasing a home is generally the biggest financial decision a person can make in their lifetime. Let’s not cloud that by talk of tax plans and changing deductions. Owning our own home, building equity, planting family roots, establishing yourself as part of a community, these are the ideals that drive our housing market.

In times like these we should take our eyes off of the headlines and focus on the benefits and advantages of home ownership, and what buying a home means to us.

Vincent Aurigemma