How the new tax reform bill will impact homeowners by SPG
As you are likely already aware, major tax reform was just approved by Congress and will
become law shortly once President Trump signs the bill. With so many changes, particularly to portions of the code affecting real estate, we here at Saydam Properties wanted to help educate our clients and friends on what changes were made and how we expect it to impact the real estate market in 2018 and beyond. There were essentially three changes that will have some amount of impact on real estate costs:
1) SALT Deduction Previously, taxpayers were able to deduct state and local property and income taxes from their Federal tax return. This still remains the case but is now limited to a cap of $10,000. It seems this will primarily impact high-income individuals or those with more expensive homes (and higher property taxes). However, this should be largely offset by the decreased tax rates considering that 5 of the 7 tax brackets will have lower tax rates going forward.
2) Mortgage Interest Deduction The mortgage interest deduction is now limited only to the interest on a loan of up to $750K (formerly $1M). This does not apply to existing mortgages however. Considering the vast majority of homebuyers do not have a loan greater than $750K, this change will have little impact. Note, home price has no bearing on this so homebuyers purchasing a home with value greater than $750K will not be impacted by this change as long as their mortgage is less than $750K. Very few homebuyers have mortgages greater than that amount. In fact, the National Low Income Housing Coalition estimates that only 1.9% of mortgage originations from 2013 to 2015 exceeded $750K in value.
3) Increase in Standard Deduction A potentially more significant impact on how homeowners file taxes is the increase in the standard deduction to $12K for individuals and $24K for joint filers. Therefore, some homeowners might find that their standard deduction provides more tax savings than itemizing their mortgage interest, state/local taxes, retirement savings, student loans and charitable contributions. However, according to the IRS, approximately 30% of taxpayers nationwide currently itemize their deductions. And of that 30%, a significant portion will still find that itemizing deductions is advantageous even under the new tax plan. As such, while the standard deduction increase will certainly eliminate the need for many people to itemize, the number of people directly impacted is just a fraction of the population.
Two more important things to note:
1) Capital Gains Exclusion for Homeowners = At one point, Congress was considering requiring homeowners to stay in their primary home for at least 5 out of 8 years to claim the capital gains exemption. That was struck down and remains at just 2 out of 5 years. Although rarely mentioned, this is a huge win for homeowners in our opinion as the tax reform will still allow a homeowner to sell their principal residence after just 2 years and exclude up to $500K in capital gains for joint filers (or $250K for single filers). Considering non-real estate investments such as stocks and mutual funds will still be subject to capital gains taxes (typically 15% for an investment held for more than a year), purchasing instead of renting still remains a solid long-term investment as the tax savings on the future home sale may be substantial.
2) Investment properties = Individuals looking to purchase investment properties have a lot to like with the new tax plan. The limitations on property tax and mortgage interest deductions do not apply to investment properties as investors can still use those expenses when calculating their net rental income or their basis for capital gains (thereby reducing the amount of tax they pay). Furthermore, the new plan provides some additional deductions for passthrough real-estate holding businesses.
In summary, there is no question that the tax plan will change how many homeowners file their taxes and change the math on the true costs of homeownership for some. But, it is our opinion, that the impact, if any, will be reduced and shorter term. Considering most of the DC region is still a strong seller's market (ie. less than 3-4 months of supply), these tax changes may help swing some areas toward a more balanced market between buyers and sellers but it's unlikely to have a dramatic impact. It's also possible there will be no impact on the real estate market as most taxpayers will see a reduced tax burden and, therefore, more purchasing power which the GOP is hoping will compensate for the deduction changes. Regardless of how the tax math shakes out, we should keep in mind that there are many more benefits to purchasing a home than just tax savings, to include control and stability of ones own home, pride of homeownership, and long-term investment, to name a few.
Disclaimer - we are not tax professionals - please seek any personal tax advice from your favorite CPA.
All our best,
Sheena and Han Saydam, Saydam Properties Group