Photo: Robert Clark
For many Americans, the sweeping changes to the US tax laws will make renting more attractive than buying a home in 2018.
Raising the standard deduction can greatly impact a family’s breakeven point and their decision to buy or rent, according to recent analysis of the bill by the DC-based think tank Urban Institute.
In its analysis of the bill’s impact on homebuying, Urban Institute ran the numbers using four income scenarios for the typical family of three — annual incomes ranged from $50,000 to $300,000 annually.
Homes were valued at four times the annual household income, and families put down a 20 percent downpayment and took out a mortgage to cover the rest of the purchase.
Urban Institute then compared the total tax bill under the new law to 2017’s tax codes, looking specifically at the difference in the tax advantages to owner-occupied housing in the 2017 plan versus the 2018 plan.
It also calculated the breakeven point under both plans, or the amount at which buying is more affordable than renting.
Urban Institute found that while “most” taxpayers will pay lower taxes, which could make saving for a home easier, the increased standard deduction means “fewer will itemize.” The reduction in tax rates indicates there will be less of a benefit for those taxpayers that do choose to itemize.
For the typical family of three earning $50,000 per year, the new tax bill has almost no impact on their homebuying decision. Under both plans, this family would take advantage of the standard deduction with their taxable income barely changed.
The scenario changes slightly for a family earning $75,000 annually. This family would have itemized their deductions under the previous tax laws, but won’t under the new ones. Their new tax bill is lower under the new law, but because they are not itemizing there are no tax savings arising from the mortgage or property taxes.
The breakeven point increases by 14 percent under the new law, or at $1,017 per month in rent, compared to $892 under previous laws. So in other words, it’s smarter for this family to buy than rent only when the rent reaches $1,017 (or higher) per month, says the Urban Institute.
The next scenario is a family earning $150,000 per year. They would itemize under both plans, and although the taxable income is substantially higher under the new plan, the tax bill is only slightly higher under the new plan. However, this family’s breakeven point widens considerably.
Under the new plan, it would be more financially advantageous for the family to rent until the rent surpasses $1,885 per month, compared to $1,500 under the previous plan — an increase of 25 percent.
Finally, the Urban Institute considered a family earning $300,000 annually. This family will see a higher taxable income and pay more in taxes under the new laws. Additionally, their breakeven threshold increases by a whopping 32 percent, where renting is a smarter decision until the rent hits $3,631 per month — compared to $2,757 under the previous plan.
But ultimately, will these changes actually deter people from buying?
“At the margin, yes. But because homeownership is generally more affordable than renting, and there are other benefits to homeownership, the impact on homeownership rates will likely be small,” says the Urban Institute in the report.
However, the effect of these changes could increase, resulting in more families and individuals choosing to rent which will have a negative impact on the national homeownership rate.
Click here to read the entire report.