President Trump has unveiled his proposal for tax reform. Under this plan, many of us will be losing key tax deductions. And people living in New Jersey will possibly be hit harder than people in many other states.
It appears that his goal is to improve economic growth. To reach this goal, his tax plan will implement a simpler tax system which will include fewer tax brackets and will also lower corporate tax rates.
The item that I see that will impact home owners the most is the elimination of being able to deduct state and local taxes, which include real estate taxes. The standard deduction will double. The new plan calls for a $12,000 standard deduction and a $24,000 deduction for a married couple. But for many in New Jersey, raising the standard deduction will not make up for the loss of the real estate tax deduction.
Also, while charitable contributions and mortgage interest deductions will remain, the plan will eliminate all other deductions.
As a plus, the generation skipping transfer tax and the estate tax will be eliminated.
The net result of the proposed tax plan will quite possibly affect the rate of home ownership. With the removal of many deductions, more people may decide that being a tenant will be more favorable to them than being a home owner. This is because eliminating home ownership tax subsidies may result in an increase of the after tax cost of owning a home.
The real estate tax deduction will remain for owners of rental properties. Other tax benefits for rental property owners will also apply. In theory, these tax benefits will pass through to tenants in the form of lower rental rates. But personally, I doubt that will happen. There is such a shortage of available rental properties already. This creates a lack of competition to these property owners. And I don’t think the property owners will see a need to pass on the tax savings to tenants.
So, should rental property owners be treated differently than people who own and live in their home?
What do you think?
Bunny and Art Reiman