The 2018 federal tax changes ushered in some long-term setbacks for homeowners — including, among other things, a lower ceiling on the mortgage interest deduction (MID) and a less generous inflation measure for determining tax brackets. But for now, homeowners and renters are celebrating tax cuts!
The average taxpayer received a tax cut of $1,610, according to a recent Zillow analysis, which used data from the Tax Policy Center. But what will homeowners and renters do with their extra money?
Zillow surveyed 10,000 adults nationwide and asked them how they will likely spend their tax cuts, and:
- 29% said they will save and invest;
- 27% of renters and 21% of homeowners said they will pay off debt;
- 15% of homeowners said they will make home improvements; and
- 11% of renters and 4% of homeowners said they will rent or buy a bigger or nicer home.
The remaining survey respondents said they would spend their extra money on things like vacations, buying a new car and entertainment.
For some households, the tax savings received may initially offset 2018’s interest rate hike, which has reduced buyer purchasing power.
But these one-time savings will dwindle over time, as the Internal Revenue Service (IRS) has now changed the way it measures inflation, meaning taxpayers will be pushed into higher brackets despite very little real income change as the years go on. That means homebuyers can’t count on tax cuts to help them make higher mortgage payments in future years.
Further, the average tax cut of $1,610 falls far short of what is actually needed to get homeowners or renters into buying or selling mode. For potential homebuyers, an extra $1,000-$2,000 is insignificant compared to what is needed for a full down payment. For renters, the average tax cut translates to a little over $100 additional a month, not enough to upgrade substantially or do much more than cover moving costs. In fact, many renters will need that extra cash just to stay in their current rentals due to rent increases alone.
Home improvements are on trend
What do homeowners do who don’t have enough money to sell and move? They make home improvements.
The extra $1,000-$2,000 the average taxpayer receives in 2018 and 2019 can easily be put toward landscaping, painting or replacing an appliance or two.
Further, today’s tight home inventory in California makes finding a replacement home especially difficult. Would-be sellers are hesitant to put their homes on the market for fear of the inability to find a suitable home to buy. This compounds the low inventory issue, meaning more homeowners are staying put in 2018.
While this is bad news for real estate brokers and agents, real estate professionals can still capitalize on the home improvement trend by using marketing materials to suit. Offering home improvement advice — including which improvements will give future sellers the biggest return on investment, important for when they do decide to sell — is a smart way to stay relevant to clients not yet ready to sell.
If most of your clients are first-time homebuyers, encourage renters in your area to put their tax savings into a savings account for their future down payment.