We now have the key provisions of the new tax bill likely to become law that relate to Illinois home values and our property tax mess. This will update the piece I did last month when Congress was considering somewhat different, competing versions.
The conclusion remains the same: Home values likely will drop materially, at least in the pricier Chicago area counties, and anger over high property taxes likely will grow.
To see why you need to understand the paradox that results from the huge increase in the standard deduction under the bill. For a married couple filing jointly, it will double to $24,000.
That’s good news for many taxpayers who will see their federal tax bill drop. The problem is that the deduction for mortgage interest and property taxes will become irrelevant to the vast majority of homeowners because they will soon be taking the standard deduction. They will come to understand they are paying 100% of those costs, so the tranquilizer of tax deductibility won’t help any more.
The data come from an update this past week by a Zillow economist. Below are the before-and-after estimates, by county in Illinois, on the percentage of homeowners who will be taking the standard deduction.
While a majority of homeowners in all Chicago area counties now itemize, that portion will drop way down under the new law to about 2% to 20%. Those counties are highlighted. The drop is less significant in other counties because most there already take the standard deduction. That’s because their home values, mortgage costs and property taxes are are much lower.
For those who do itemize, who are mostly higher income, the deduction for all state and local taxes, including the property tax will now be capped at $10,000. Many will easily blow through that just on their state income taxes, again making the property tax deduction worthless. For new homeowners, the deductibility of mortgage interest will also be limited to mortgage amounts of $750,000.
As to whether you like the tax bill on the whole, you might want to hold off until the hype dies down. Both sides are making exaggerated claims and cherry-picking. There’s much to like, much to criticize and much we don’t know yet. One thing for sure is that wildly hysterical opponents have convinced the middle class they’ll be getting a tax increase, and that’s nonsense.
UPDATE 12/17/17: When I said to hold off making final judgements on the bill because there’s much we don’t know, one big reason is loopholes, and there appear to be plenty.
One, already discussed, is prepaying some state and local taxes this year while they are still deductible if you stand to lose the deduction. Well, a last minute change in the bill, according to today’s Tax Foundation article, closed that option except for property taxes, apparently. Cook County already has the process online whereby you can pay, this year, the first installment of taxes due next year. Other counties may be the same. Let me emphasize that I haven’t verified whether it will work.
What will really get interesting is whether, somehow, you will be able to basically lease your property to yourself and thereby fully deduct mortgage interest and property taxes, perhaps by setting up a separate entity to hold title. I’d expect some kind of self-dealing restrictions will prohibit doing it that simply, but I’d also expect tax planners to get very creative. Maybe your friend holds title to your house and leases it long term to you, and vice versa. Many variations are imaginable. Wait to get the details and consult a tax pro, as they always warn.
-Mark Glennon is founder and Executive Editor of Wirepoints. Opinions expressed are his own.