8-Jan-18 – Chicago apartment renters – especially those who lease their digs from small “Ma and Pa” landlords – could be slapped with hefty rent increases in 2018 because of tax reform.

The Tax Cuts and Jobs Act, which took effect January 1, likely will take a big bite out of a small landlord’s write-offs for property taxes. Under tax reform, deductions of state and local property taxes are now limited to $10,000.

If the owner of a $1 million three-flat in Old Town has his real estate tax deduction cut to $10,000 from $25,000, it would mean the loss of $15,000 or more in write-offs, and those losses likely would be made up with rent increases, management experts said.

Million-dollar home and condominium owners in the Loop, Gold Coast, Lincoln Park, Lake View, Edgewater, and other upscale lakefront Chicago neighborhoods with property tax bills of $20,000 to $25,000-plus also will see their tax write-offs sliced in half – or more under tax reform, taking major bucks out of their wallets.

According to United States Senator Dick Durbin (D-Illinois), the State and Local Tax (SALT) deduction is used by nearly one-third of all taxpayers nationwide to help them avoid being taxed twice – once at the state and local level and again at the federal level.

“Illinois has the fifth highest number of taxpayers who claim this deduction,” said Durbin (left). “Weakening of SALT will hit Illinois especially hard.”

Nearly two million Illinois residents used the deduction in 2015 to claim an average deduction of $12,500 on their taxable income, according to Durbin.

Public skeptical about tax reform

Generally, Americans view the $1.5 billion tax reform law as benefiting the wealthy and corporations, according to opinion polls. People are skeptical tax reform will do much for middle-class taxpayers.

Tax reform took a historic step in directly revising the mortgage interest deduction – a $70 billion annual tax expenditure. The new tax law reduces the mortgage interest deduction cap to $750,000 from $1 million. However, it retains the mortgage interest deduction for second homes.

Cutting the coveted home mortgage interest deduction will directly have a negative effect on the average American homeowner, predicted the National Association of Realtors and National Association of Home Builders.

The Internal Revenue Service reports that half of the 32 million households claiming the home mortgage deduction earned less than $100,000 annually.

One of the most valuable current tax benefits of homeownership – the right to pocket capital gains on home sales without paying federal income taxes – survived tax reform.

The capital gains exclusion allows homeowners to exclude up to $250,000 – or $500,000 for married couples – in capital gains on the profit from the sale of a home or condo if the owners have lived in the residence for two of the last five years.

The new tax law eliminates the deduction for interest on home equity loans. Before tax reform, write-offs were allowed for up to $100,000 in debt.

And, tax reform preserves the benefit for real estate investors to make tax-deferred exchanges of property, commonly referred to as “like-kind” exchanges.

Be sure to check with your tax professional regarding details on the new tax law, experts advise.

One thing is for sure. The loss of homeownership tax benefits could discourage some buyers from jumping into the housing market in 2018 as mortgage interest rates creep higher.

Lawrence Yun (right), chief economist of NAR, predicted that “existing home sales will probably not make gains in 2018 even as the economy creates more jobs.” It would be the first year of flat or falling home sales since the housing crash 11 years ago.

Another damper on home buying likely will be higher interest rates in a stronger economy sparked by tax cuts. Yun predicts that benchmark 30-year fixed home loan rates should increase from the current 3.9 percent to 5 percent by the end of 2018.