How the Tax Cuts and Jobs Act Affects Real Estate

Posted by Mike Brown Group on Monday, January 29th, 2018 at 3:28pm.

Many are wondering how this new law will affect the housing market. For the most part, the latest tax reform will boost the average paycheck and do little to harm the housing market. Tax policy changes, even when directly tied to housing costs, affect demand for housing primarily through disposable income channels. The Tax Cuts and Jobs Act is likely to increase disposable income for the majority of U.S. taxpayers, including many taxpayers affected by the reduction in state and local tax deductibility. The U.S. Treasury estimates about 90% of people will see more take-home pay because of the tax reform, starting as soon as February. 

At the top of the changes in the new tax law is the limiting of the mortgage interest deduction. Previously, a new homeowner could deduct interest on mortgages up to $1 million. The new bill lowers that threshold to $750,000 for primary and secondary residences. Lowering of the mortgage interest deduction may almost become a moot point for taxpayers. The Tax Cuts and Jobs Act doubles the standard deduction for single filers to $12,000 from $6,350 (up from 2017) and $24,000 from $12,700 for couples, possibly eliminating the need to itemize for homeowners with mortgage interest and property tax bills that fall below these thresholds (assuming no other big potential deductions).

Try this calculator to see how the new tax rates affect you:
Evan Liddiard, director of tax policy at the National Association of Realtors, said in a phone interview from Washington, “We consider this a major change in the way federal housing policy is executed, for more than 100 years, the IRS has incentivized homeownership through the mortgage interest and property tax reduction. This will change in a major way because of this bill.”
Interest deductions and home equity loans

The new law also eliminates deductions for interest on home equity loans. In the past, these loans have covered home renovations, college tuition bills and other personal expenditures. Rodney Ramcharan, an associate professor of finance and business economics at USC’s Marshall School of Business and a former executive at the Federal Reserve said, “Removing a deduction as widely used as interest on home equity loans threatens to make owning a home a bit less attractive. The use of the home equity loan took a relatively illiquid asset and made it very liquid. Doing away with that deduction will have a big impact on the usefulness of the house as an asset. Historically, people have concentrated much of their wealth in housing. And this could very well affect that.” –
Disallowance of deductions for state and local income tax and property tax (temporary)
The state and local deduction(s) for property taxes will also be capped (also known by the acronym SALT) at $10,000. Analysists project this change will have its greatest impact in comparatively high-tax states such as California and New Jersey. The National Law Review outlines the changes as follows:
·       Limited to $10,000 per year.
·       No limit for real property taxes paid or accrued in connection with a trade or business. However, state income taxes that are payable by a non-corporate investor in a pass-through entity are subject to this $10,000 aggregate deduction limitation. For example, assume that Jeff is a 50 percent member of an LLC which owns an office building in Illinois. The LLC pays $200,000 in real property taxes, and has total net income of $500,000. Jeff’s 50 percent share of the property taxes ($100,000) is fully deductible for federal income tax purposes, but the Illinois income taxes that he pays on his 50 percent share of the net income (the state tax on his $250,000 share of the profits), along with (i) any other state income taxes he pays and (ii) any real property taxes he pays that are not associated with a trade or business, are subject to the $10,000 limit on state and local taxes that would be allowed as a deduction
·       Expires after 2025
Capital gains exclusion 
Home sellers can exclude up to $500,000 for joint filers or $250,000 for single filers for capital gains when selling a primary home as long as the homeowner has lived in the residence for two of the past five years. An earlier proposal would have increased that requirement to five out of the last eight years but it was struck down.
Moving expenses 

The law eliminates the deduction except for members of the military.

Estate tax

The law doubles the estate tax exemption to $11.2 million.

1031 Exchange

The new tax law leaves unchanged the provision known as the 1031 Exchanges. Sellers of commercial properties will still be able to defer paying capital gains taxes on such sales if they use the proceeds to purchase another similar property.
There is little doubt that the Federal Reserve will raise interest rates in 2018, the question is by how much. Citing the newness of the tax reform, many economists are taking a cautiously optimistic wait-and-see approach as to how our economy will ultimately respond to the changes that will soon be implemented.
We at the Mike Brown Group are happy to answer any questions you may have regarding our local housing market. Please feel free to contact us anytime, we’re always available to assist you in any capacity.

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