A number of longstanding federal tax benefits of homeownership — including the ability to deduct all local property taxes paid in a given year and a lofty $1 million cap on the size of loans eligible for mortgage interest deduction — were changed as part of the recently passed tax legislation. While all of the nuances and consequences of the law’s sweeping reforms have yet to be fully explored or realized, some of the more immediate questions on its effects on the housing market, homeowners and homeownership in general can be answered.

We’ve collected some of the most pressing questions and provided general answers — with the caveat that local laws and individual circumstances will change the impact of these laws to varying degrees. We will update this list as more questions emerge, and strive to answer them whenever possible with objective, data-backed conclusions.

Overall, does this tax reform increase or decrease homeownership incentives?

How will the doubling of the standard deduction impact the mortgage interest rate deduction?

What does the survival of the capital gains exclusion mean for homeowners?

How will the new $10,000 limit on state and local income and property tax (SALT) deductions affect homeowners?

What impact will the new mortgage interest deduction cap have on current homeowners?

Will changes to deductible interest on home equity loans impact homeownership rates?

How does the new legislation impact second/vacation homeowners?

Why are homeowners/taxpayers in expensive, highly taxed areas more likely to feel a pinch from this new bill?

What about other, more corporate-focused tax policies like the Low-Income Housing Tax Credit (LIHTC)? Will changes to the code impact these programs?

Overall, does this tax reform increase or decrease homeownership incentives?

This reform definitely removes some the federal government’s preferential treatment towards homeowners. Ultimately, more households will be more likely to maximize their tax breaks with a standard deduction rather than with individual, itemized deductions. And using the standard deduction means it doesn’t matter if a potential home buyer spends an extra $5,000 on a house, a boat, or a vacation – all that spending is now treated the same. This could remove the incentive to spend a little more on a home in hopes of recouping some of that spend come tax season.

But at the end of the day, people choose to buy – or not buy – a home for a whole host of reasons, not just what their tax bill looks like in April. Most future changes in the housing market as a result of tax reform, if any, won’t come because of the few housing-specific provisions the legislation includes. Rather, the health of the housing market is and will continue to be dependent upon the after-tax incomes of households on the margin between renting and buying. If the tax bill puts more money in their pockets, they may lean more toward buying. If it takes some money away, they may choose to rent. Along those lines, it will be interesting to see how the temporary nature of some of these tax cuts shakes out. Will those households on the edge of homeownership make decisions based on what their new take-home income is next year, or will there be some apprehension if they think their taxes will rise down the road?



How will the doubling of the standard deduction impact the mortgage interest rate deduction?

A doubled standard deduction will have a big impact on how many homeowners ultimately decide to take advantage of the mortgage interest deduction. When you combine a much larger standard deduction, with the fact some itemized deductions have been capped or pared back, many filers may no longer find it financially advantageous to itemize deductions. Zillow calculated that under the current tax code, itemizing and claiming the mortgage interest deduction is financially worthwhile on about 44 percent of all U.S. homes. Under the new legislation, itemizing and claiming MID is worthwhile on just 14.4 percent of homes nationwide.

Ultimately, the combination of all new provisions in the tax code will determine if a filer is better or worse off, but changes to the standard deduction and SALT deductions will change the calculus about where some people might choose to spend their money. If the size of their tax return no longer depends on what they bought that year, some homebuyers may decide not to spend as much on mortgage debt as they otherwise might have.



What does the survival of the capital gains exclusion mean for homeowners?

About 10 percent of home sellers last year sold their home after living in it between two and five years. Previous versions of the tax bill upped the requirement for residency to five of the past eight years in order to avoid capital gains, from the current minimum of two of the past five. Were these laws enacted, would-be sellers of homes occupied less than five years may have been on the hook for sometimes hefty capital gains tax bills, and may have decided to hang on to their home a bit longer. This very likely could have had the effect of further limiting inventory at a time when the number of homes for sale is already incredibly low. Keeping the status quo means these sellers no longer need to make that difficult choice, and can instead feel more free to list their home on a more flexible schedule without fear of a potentially hefty tax hit.



How will the new $10,000 limit on state and local income and property tax (SALT) deductions affect homeowners?

Households that pay more than $10,000 in combined state and local taxes each year will be impacted by the new SALT limits. On one hand, taxpayers with SALT liability more than $10,000 who still itemize deductions will get a smaller tax break. However, considering the previous versions of the bill, the continued availability of those deductions in the final plan, even if they are capped, may be the deciding factor between whether or not they choose to itemize deductions. This matters a lot in areas where SALT deductions are a relatively more-significant reason for itemizing — areas with lower home prices, but higher taxes (including places like upstate New York, southern New Jersey and inland California).



What impact will the new mortgage interest deduction cap have on current homeowners?

Homeowners who closed before December 15, 2017 will be grandfathered in under the old $1 million loan cap on mortgage interest deductibility. So their deductions will not be directly affected – at least not until they move or refinance. Most estimates suggest that by limiting some buyers’ purchasing power, capping the deduction could contribute to slower home value growth in the priciest communities. This could limit the gains longtime homeowners can expect when they do eventually sell.



Will changes to deductible interest on home equity loans impact homeownership rates?

People make housing decisions – and transition between renting and buying – for a number of reasons. The deductibility of interest on home equity loans doesn’t seem to be very high on that list. While the change is an example of how the tax bill removes some incentives to homeownership, this provision probably won’t play much of a role – if any – in influencing the homeownership rate. A host of personal and economic factors matter a whole lot more. Some interest may still be deducted if it’s used to substantially repair a home. However, it’s possible that if fewer homeowners itemize their deductions and if fewer people are incentivized to take home equity loans, they may neglect or delay important repairs and upkeep, especially those on strict budgets. This potential for underinvestment in existing homes could make it more difficult for struggling communities with an aging housing stock, in particular, to reinvent themselves.

How does the new legislation impact second/vacation homeowners?

Even though the final bill retained the deductibility of mortgage interest on second homes, folks buying a second home could see fewer benefits, but likely for different reasons than others. Taxpayers with second homes are more likely to have enough combined mortgage debt for itemizing to make financial sense, but they’re also more likely to hit the lower MID cap. Combined with the $10,000 cap on property tax deductions, owners of multiple homes may end up worse off under the new bill than under the older legislation.



Why are homeowners/taxpayers in expensive, highly taxed areas more likely to feel a pinch from this new bill?

Consider two hypothetical, relatively well-off, homeowning households (earning an annual income in the top-third of all incomes and owning a home valued in the top one-third of all homes for their area) – one living in the higher-cost New York area, and another in the less-expensive Raleigh, N.C., area.

In New York, this household earns $155,300 per year, and pays $11,947 in state income tax. The median value of their home is $790,100, and they pay $11,452 in annual property taxes. All told, they pay approximately $23,399 per year in combined income and property taxes.

A similar household in Raleigh earns somewhat less per year, about $132,400, and owns a less-expensive home valued at $405,600. But they also pay much less in taxes – about $6,751 in state income tax and $3,491 in annual property taxes, on average, for a combined total of $10,242.

Under the old legislation, these homeowners could deduct the full, combined total of state income taxes and property taxes. But the new legislation caps this deduction at $10,000. The homeowner in Raleigh is barely impacted, losing the ability to deduct just $242. But the homeowner in New York can no longer deduct more than $13,000 from their federal return. In less-expensive markets with lower tax burdens, current homeowners may not notice much of a difference. But in more expensive, highly taxed areas like California, New York and New Jersey, the differences in the amount of eligible deductions they can file in 2017 versus 2018 could be very striking.



What about other, more corporate-focused tax policies like the Low-Income Housing Tax Credit (LIHTC)? Will changes to the code impact these programs?

LIHTC was preserved in its current form under the new legislation, but the significant lowering of the corporate tax rate – from 35 percent to 21 percent – may make the availability of these credits less attractive. LIHTC is a fairly complex program, but in a nutshell, it allows corporations to lower their effective tax rates in exchange for purchasing tax credits that enable developers to finance construction of affordable housing with the proceeds. Under the new, lower corporate tax rate, some corporations and investors may see less value than they used to in purchasing a credit that lowered their tax rate. And if there isn’t as much demand for these credits, it’s possible that fewer units of affordable housing get built.