Will I lose my mortgage deduction in 2018 with the increased standard deduction?

[Tina]

Will your state taxes be affected if you take the $24,000 Standard Deduction?  In my state if you take the Federal Standard Deduction then you must take the state's standard deduction which is only $3,000 for married couples filing jointly.     Will I be better off  itemizing deductions on the Federal Tax Return for about $23,000 and then using the same $23,000 itemized deductions on my state tax return?.   Our state tax rate is 6%.

[ajagannathan]

Slav4ikMD wrote:

Well, for say a 1 mil home with 20% down and a mortgage of 800k, you certainly pay more than 24k in interest in the first few years.  So no, this IS significant.

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Sorry you're right I mis-entered into the amortization calc, even at 4.5% a 30 yr fixed on a 750k loan would be 33k interest the first year.  So 10k SALT max plus that would easily exceed standard deduction for many many years.

[Slav4ikMD]

Well, for say a 1 mil home with 20% down and a mortgage of 800k, you certainly pay more than 24k in interest in the first few years.  So no, this IS significant.

[q-school]

Not everyone thinks similarly. If early financial independence and retirement is low on their priority list, there may not be a need to “skimp” on house or car purchases. Yes they will take a loss sometimes if they move but again, they can afford to.

Wci emphasizes that most physicians can be financially independent in ten years donor they need to blow off some steam with a nice house that’s their choice.

Some lessons you have to learn the hard way. That’s even assuming that some day they agree. All Our kids likely will not graduate having to financially support their parents. They will likely have little educational debt. They may inherit significant amounts. They will live their own lives and may choose to explore the world differently.

[mitochondria]

I have tremendous respect for DMFA, but I agree with iradoc. Disclaimer- before the tax reform bill passage, I believed that the mortgage interest write off was an overblown selling point of owning a home.  The financial value of owning a home was precarious before the tax reform.

I would not be to enthusiastic about buying an expensive home for "investment" or "tax benefit" purposes going forward.  Now, if one chooses to live in a nice home that is a little on the high end, then that is OKAY if that is what makes you happy.  My only point is that don't justify that decision by believing that some how the tax write off makes financial sense. This is a nice side perk for what is largely a non-financial decision.

The "appreciation" of your home over time also does not make financial sense (compared to other investment choices) if you are paying a mortgage (I've carefully read DMFA's very logical explanation of not paying off a low interest mortgage above).  Now, if you are paying cash on the spot for a home, then we could potentially make a stronger argument for an appreciating asset (the annual property tax obligation not withstanding).

My experience is that in the real world, young physicians get into first homes that are way to expensive considering their current debt obligations and there is an opportunity cost of not maximizing their tax advantaged accounts early in their careers. A young physician explained to me about a month ago that they were "deprived compared to (their) peers" and they had "suffered enough". Again, I'm not saying don't buy a home, but rather be reasonable. You don't need to pay $500K-$600K to have a "nice" home when you are just getting started at the cost of limping along with your retirement contributions. I'll get off my soap box now...

[littlefish]

delete

[ajagannathan]

Slav4ikMD wrote:

“Likewise, I would expect to see a lot of houses that ought to cost $650K or $700K to sell for $750K now so people can “maximize their tax savings.”

Interesting thought – I can see how psychologically that may be.  But hopefully most home buyers are a little smarter than that.  What I can definitely anticipate though is that folks looking to buy in pricier suburbs (like mine), will look to limit their *mortgage* to 750k, and with a typical 20% down it will mean limiting the price of the house to low 900’s – with many houses in my neighborhoods being at just around a mil or a little over, I can see THAT dropping prices.  Neighborhoods with higher property taxes are also likely to take a hit.

 

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Correct me if I'm wrong, but my understanding was that the majority of people in this home buying situation would be switching to standard deduction of 24k and not benefiting from deducting the mortgage interest anyway?

[ajagannathan]

DMFA wrote:

iradoc wrote:

jz wrote:

Strongly disagree with Hank, above.  With most all taxpayers becoming standard deductors, the real and psychological tax benefits of any interest+property tax < $24k /couple combo will evaporate.  We are on the precipice of watching deflation of private home ownership.

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Agree with this.  I currently have a 10 yr fixed 2.5% mortgage with balance of 8 1/2 yrs left at 425k that I have no incentive not to prepay aggressively now as I’m going to use the standard deduction moving forward.  Had the new tax laws been in place when I was looking at houses I most definitely would have looked for cheaper houses in areas with lower property taxes (current 20k/yr).  Neighborhoods like mine are going to take a serious property value hit the next few years, I’d guess 10-15% at least.

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I think better gains in the market than preventing finance charges are an incentive not to pay aggressively on a low-interest, short-term loan.  You’re looking at about $47,195 in interest paid over 8.5 years; from a lump-sum perspective that’s (1+[47195/425000])^(1/8.5) – 1 = 1.247% CAGR; that’s like 1-year CD rates, and you *should* be able to beat the nominal 2.5% even though you can’t directly compare finance charges prevented on a simple amortizing debt to compound growth of investments based on a simple percentage rate.  More simply put, 2.5% is pretty good arbitrage.

Now, if you have no use for that arbitrage because you’ve got a high net worth and income, and you’re already hitting well-placed investment goals, and there’s no real point to increasing your exposure to market risk, sure, have at it.  Further, if your property value is decreasing, then you’re putting money into a depreciating asset…doesn’t seem like something I’d really want to do.  I’d share the risk with the bank and keep my money in the market, but you are never wrong to take the certain thing and eliminate the debt.

You know what your risks are either way.  You’re going to make the decision that’s right for you because only you know your goals and comfort level, and that’s fine.  You don’t have to please the people in the ivory tower like me.

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Absolutely, you are right from a numbers standpoint.  Though in my situation I'm fairly happy psychologically with my current risk exposure wrt AA.  I was already considering prepaying off the mortgage even before the new tax deal, but wasn't in any rush at all given the mortgage interest deduction.  Now that that deduction is useless to me, my feeling is I may as well just get this (light as it may be) monkey off my back.   I'm just going to shorten my timeline in 1/2 or so, I just prepaid two years of property tax so I'll just pour the refunded escrows the next couple yrs back into the principal.

This is a great site, such invaluable info.  

[Slav4ikMD]

Yeah I'll probably shoot for 15 anyway.  Even if it depreciates in value, it's still better to have more equity rather than less.  Much of this is purely psychological.  And I doubt we'll see huge drops in real estate prices, unless something ELSE happens.

re "I just up mine to the next round hundred and add $100."  I do something similar - I have a "laddered" approach (not sure if others do that too, but I just came up with it) - first year I added $200 a month, then $400 a month etc - this forces me to basically throw any small increases in income into the mortgage (as long as I can still maximize all tax deferred savings and such).

[DMFA]

A good hedge would just be to pay it like it's a 15-year, or even a 10. It's okay to have a small amount of guaranteed low gains on your overall portfolio, esp if it's a big one. Preventing finance charges can be thought of like that.

I just up mine to the next round hundred and add $100...so if the payment is $1850, I just up it to $2000.

[Slav4ikMD]

I currently have a 30 year fixed 3.75% mortgage with around 800k, just 2 years into, prepaying more and had a plan to increase payments further to pay off in 10-15 years, but now questioning whether that is a wise decision.  As DMFA said, putting money into a depreciating asset doesn't sound like fun.  At the same time becoming debt free is still pretty cool. (I think our most likely plan is to live there for 15 years and then downsize once kids grow up.)  So really not sure what to do...  will probably continue to pay moderately aggressively and see what happens over the next 2-3 years.

[Slav4ikMD]

"Likewise, I would expect to see a lot of houses that ought to cost $650K or $700K to sell for $750K now so people can “maximize their tax savings."

Interesting thought - I can see how psychologically that may be.  But hopefully most home buyers are a little smarter than that.  What I can definitely anticipate though is that folks looking to buy in pricier suburbs (like mine), will look to limit their *mortgage* to 750k, and with a typical 20% down it will mean limiting the price of the house to low 900's - with many houses in my neighborhoods being at just around a mil or a little over, I can see THAT dropping prices.  Neighborhoods with higher property taxes are also likely to take a hit.

 

[DMFA]

iradoc wrote:

jz wrote:

Strongly disagree with Hank, above.  With most all taxpayers becoming standard deductors, the real and psychological tax benefits of any interest+property tax < $24k /couple combo will evaporate.  We are on the precipice of watching deflation of private home ownership.

Click to expand…

Agree with this.  I currently have a 10 yr fixed 2.5% mortgage with balance of 8 1/2 yrs left at 425k that I have no incentive not to prepay aggressively now as I’m going to use the standard deduction moving forward.  Had the new tax laws been in place when I was looking at houses I most definitely would have looked for cheaper houses in areas with lower property taxes (current 20k/yr).  Neighborhoods like mine are going to take a serious property value hit the next few years, I’d guess 10-15% at least.

Click to expand...

I think better gains in the market than preventing finance charges are an incentive not to pay aggressively on a low-interest, short-term loan.  You're looking at about $47,195 in interest paid over 8.5 years; from a lump-sum perspective that's (1+[47195/425000])^(1/8.5) - 1 = 1.247% CAGR; that's like 1-year CD rates, and you *should* be able to beat the nominal 2.5% even though you can't directly compare finance charges prevented on a simple amortizing debt to compound growth of investments based on a simple percentage rate.  More simply put, 2.5% is pretty good arbitrage.

Now, if you have no use for that arbitrage because you've got a high net worth and income, and you're already hitting well-placed investment goals, and there's no real point to increasing your exposure to market risk, sure, have at it.  Further, if your property value is decreasing, then you're putting money into a depreciating asset...doesn't seem like something I'd really want to do.  I'd share the risk with the bank and keep my money in the market, but you are never wrong to take the certain thing and eliminate the debt.

You know what your risks are either way.  You're going to make the decision that's right for you because only you know your goals and comfort level, and that's fine.  You don't have to please the people in the ivory tower like me.

[ajagannathan]

jz wrote:

Strongly disagree with Hank, above.  With most all taxpayers becoming standard deductors, the real and psychological tax benefits of any interest+property tax < $24k /couple combo will evaporate.  We are on the precipice of watching deflation of private home ownership.

Click to expand...

Agree with this.  I currently have a 10 yr fixed 2.5% mortgage with balance of 8 1/2 yrs left at 425k that I have no incentive not to prepay aggressively now as I'm going to use the standard deduction moving forward.  Had the new tax laws been in place when I was looking at houses I most definitely would have looked for cheaper houses in areas with lower property taxes (current 20k/yr).  Neighborhoods like mine are going to take a serious property value hit the next few years, I'd guess 10-15% at least.

[jz]

Strongly disagree with Hank, above.  With most all taxpayers becoming standard deductors, the real and psychological tax benefits of any interest+property tax < $24k /couple combo will evaporate.  We are on the precipice of watching deflation of private home ownership.