Author Topic: Tax Reform Update and what this could mean for the Housing Market  (Read 1228 times)

Offline Marlene

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Tax Reform Update and what this could mean for the Housing Market

Here’s a great piece of information on how the upcoming tax reform could have an impact on our businesses:

Yesterday’s edition of the Wall Street Journal has a piece on how the House tax reform bill would hurt the wider homebuilding industry (homebuilders, realtors, mortgage lenders, mortgage brokers, title companies), resulting in a wave of lobbying efforts to halt this part of the speeding tax reform train.

The bill, as was expected, nearly doubles the standard deduction to $24,000 for married couples, thereby eliminating the tax benefit of buying versus renting a home for homes under $800,000  (open the second attachment for a prior note with a detailed discussion). However, surprising most observers, the bill also cuts in half the mortgage amount upon which interest would be deductible, from $1 million to $500,000, and also limits the amount of property taxes that can be deducted to $10,000 - which for many states, translates to the amount of property taxes on a home in the $500,00 - $800,000 range - so the benefit of the property tax deduction for homes above this threshold would be lost. The combination of the lower ceiling on the amount of interest that can be deducted and the $10,000 limit on property tax deductions will eliminate much of the tax benefit on the purchase of homes above $500,000.

In addition, other provisions of the bill would make it less desirable for many to: (1) purchase second homes; (2) purchase homes for a short-term investment; or, (3) purchase homes to use as collateral for a low cost line of credit.

These changes to existing law, limiting the tax advantage of purchasing higher end homes,  combined with the doubling of the standard deduction, eliminating the tax benefit of buying homes under $800,000, is being felt as a pincher attack on the wider homebuilding industry , and the industry is very cross.

Here is a brief summary of how these provisions of the bill might negatively impact the home industry:

Increase of Standard Deduction to $24,000– As discussed in my prior note, an analysis by Zillow indicates that increasing the standard deduction from the current $12,700 for a married couple to $24,000 would eliminate the tax advantage of buying rather than renting a homes under $800,000 cutting out this segment of potential homebuyers from the tax benefit of purchasing a home. Under current law, this buy v. rent threshold is about $300,000. The Zillow analysis says that under current law, 29% of homes nationally fall into this $300,000 range where there would be a tax benefit to buying v. renting, but that the proposed increase in the standard deduction would result in only 5% of homes falling into this category.

Cutting Deductible Mortgage Ceilings to $500,000:  As noted, this took everyone by surprise. Under current law, a homeowner can deduct the interest on the first $1 million of a mortgage incurred to acquire a home. The bill would cut this amount in half, so only interest on the first $500,000 of debt would be deductible. This change would be effective for a mortgage transaction to acquire a home after November 2, 2017 (the date the bill was released). This would not impact existing home mortgages. There is an exception where the home purchaser has a binding contract to purchase the home prior to Nov. 2, 2017, but the closing on the home must occur before the end of 2017.Consequently, there is some leeway for deals in the pipeline, but others without a binding contract or which won’t close by year-end will be out of luck. This might result in pending contracts or contracts that cannot be closed prior to year-end to be cancelled, further exacerbating the homebuilding industry’s problems with the bill, since contract cancellations this year might affect 2017 earnings, requiring homebuilders to revise estimated earnings.

Mortgage Interest Deduction Eliminated for Second Homes: The current $1 million home mortgage interest deduction rule allows taxpayers to use this $1 million deduction eligible mortgage amount to acquire a primary residence and/or a second home. The bill would not allow a home mortgage interest deduction on a second home. This would hurt housing markets where vacation homes are a material segment of the market (Florida, Arizona, Nevada, North Carolina). Another, less obvious potential impact on a small segment of the market might be waterfront homes. Under the current rule, a boat with sleeping, cooking and toilet facilities can qualify as a second home, so that a loan to .purchase a larger boat can qualify for this second home interest deduction. To the extent that potential customers might be drawn to waterfront communities to purchase a boat to dock in the back yard, the elimination of this benefit could hurt.

Second Mortgage to Secure Home Equity Line of Credit: Under the existing rules, a homeowner can deduct interest on a home equity line of credit up to $100,000 (in addition to the interest deduction on up to $1 million of acquisition mortgage debt). The bill would eliminate the deduction of interest on a home equity line of credit incurred after November 2, 2017, further reducing the benefit of owning, rather than renting a home.

$500,000 Tax Free Gain on Sale of Primary Residence: Under the current rules, a married couple can exclude up to $500,00 of gain on the sale of their primary residence if they have lived there for at least two years. The bill would require the home to be used as their primary residence for at least five years. Worse, the bill would phase out this benefit for couples with gross income above $500,000. This would materially reduce the market for potential customers who are motivated, in part, by purchasing homes for mid-term investments (and the House Ways and Means Committee Report on the bill expressly says that the reason for these changes is to reduce tax benefits for home flippers).

Regards,

Marlene Flores - 917-208-6709
Douglas Elliman Real Estate
47-37 Vernon Blvd.
Long Island City, NY  11191
marlene.flores@elliman.com


Offline Matt

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Re: Tax Reform Update and what this could mean for the Housing Market
« Reply #1 on: December 27, 2017, 12:31:58 PM »
I'm starting with a disclaimer by saying that I am not an accountant. As I've been hearing about the changes that come with the new tax bill, my thoughts quite naturally went to, "how does this affect me?". I've been thinking more and more it would be negative financially based on the fact that I would no longer be able to itemize deductions. Doing a rough calculation using my 2016 taxes and comparing it to what will go into affect in 2018 using this article to guide me: https://www.investopedia.com/taxes/how-gop-tax-bill-affects-you/, it looks like I will be paying close to $2,000 more in taxes in 2018. This didn't factor in increases in pay. When this is combined with the possibility that this could mean a decrease in property values and the fact that the US president (I originally wrote our president, but he certainly is not mine) will likely be saving millions of dollars personally from these changes I can't help but be pissed off. Has anyone else taken the time to see what they will likely be paying in taxes?

http://www.msnbc.com/rachel-maddow-show/how-much-will-trump-personally-benefit-the-gop-tax-cuts

https://www.forbes.com/sites/danalexander/2017/12/18/president-trump-could-save-11-million-a-year-from-new-tax-bill/#61d4016a2337

Offline Matt

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Re: Tax Reform Update and what this could mean for the Housing Market
« Reply #2 on: December 27, 2017, 12:34:57 PM »
Oh - and I left out that I work for a nonprofit which is likely to lose many donations due to the fact that most people will loose the tax benefit of doing so. Ironically we do work that the government should be doing, but does not have necessary funding. 

Jackson Heights Life

Re: Tax Reform Update and what this could mean for the Housing Market
« Reply #2 on: December 27, 2017, 12:34:57 PM »