Will 2018 be a busy year on the housing front? It's too early to say. But thanks to some key changes in the tax code, homeownership in some areas of the country has seemingly become less affordable overnight. If you're thinking of buying property this year, here are a few points you need to be aware of.
1. Your housing costs shouldn't exceed 30% of your take-home pay
Regardless of how the recent tax changes end up impacting you, a homeowner's housing costs should never exceed 30% of take-home pay. Different folks have their own interpretations of what peripheral expenses that 30% threshold should encompass, but at a minimum, it should cover known costs like property taxes and homeowner's insurance. For better protection, however, I'd recommend that that 30% mark include maintenance, as well.
The typical U.S. homeowner spends anywhere from 1% to 4% of their home's value on maintenance each year. If you're buying for the first time, there's no way to know where you'll fall in that range, but if you aim for 2.5% -- smack down the middle -- and are looking at a $400,000 home, that's roughly $833 per month in maintenance.
If you then take that $833 and add it to your monthly mortgage payment, property tax payment, and homeowner's insurance payment, your total should not be greater than 30% of your monthly income. If it is, you're leaving yourself with limited wiggle room for unplanned expenses that may arise in the future.
2. You can still deduct your mortgage interest -- to a point
The mortgage-interest deduction has long been criticized for favoring the rich, and so some legislators have been arguing to eliminate it for years. Thankfully, this key deduction is still intact for the current tax year -- albeit at a lower threshold.
It used to be that you could deduct interest on your mortgage for loans valued at up to $1 million. But as a result of the new tax changes, that limit has been lowered to $750,000. If you're an average earner looking to buy a modest home, you should be able to deduct your mortgage interest in full. But if you're looking at pricier homes, or live in an expensive area of the country where home prices are inflated, you may want to be more cognizant of that cap.
Of course, if you're not planning to itemize on your tax return, there's no need to worry about the mortgage interest deduction, or any deduction, for that matter. As it is, the majority of taxpayers don't itemize, and since the new tax rules effectively double the standard deduction, it's estimated that fewer filers will do so going forward. But if your intent is to itemize, then be aware of the aforementioned limit.
3. Your property tax deduction may be capped
Just as the new tax laws limit the mortgage interest deduction, so, too, do they limit the extent to which you can deduct property taxes. In fact, going forward, your total SALT (state and local tax) deduction maxes out at $10,000, whereas prior to 2018, it was unlimited. If you're thinking of buying a home in a low- or no-income tax state, and you don't expect your property tax bill to be particularly high, then the $10,000 cap won't impact you. But if you're buying a home in, say, New Jersey, which boasts the highest property taxes in the nation, you may come to find that a portion of your property tax bill is non-deductible.
Again, if you're not planning to itemize on your tax return in the first place, then there's no need to worry about this change. But one thing you should be aware of is that some experts say that home values may soon start to drop as a result of the new laws, since, by taking away a portion of the tax breaks buyers once enjoyed, they make ownership less affordable in some parts of the country.
If you're buying a home because you plan to live there for quite some time, this may not be too concerning. But if your plan is to buy a home, flip it, and unload it in a year or so, prices could start to fall when more buyers see their tax breaks go down and their tax bills go up.
Buying a home can be a wise financial decision that serves you well, not only at present, but for many years to come. Just be sure to know what you're getting into before signing that mortgage.
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