On Dec. 19, 2017, Congress sent to President Trump the most sweeping tax overhaul in more than three decades, and he's promised to sign it into law by Christmas. When that happens, it will be hailed as the Republican Party's first major legislative achievement since assuming majority control of executive and legislative branches of government this year.
As the measure -- with an estimated price tag of between $1.5 trillion and $2 trillion -- was making its way through both House and Senate chambers, then to a conference committee in November, before final passage, special interests were poring through the more-than-500-page documents to determine what impact the reform would have on their constituency -- among them, homeowner advocates.
Supporters of the plan say it amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. But Democrats didn't see the same outcomes, instead claiming the cuts would only benefit the richest citizens. And opponents cited other "flies in the ointment" -- tax credits for sending children to private schools, a repeal of the Affordable Health Care Act, and including a fetus as a dependent.
The tax-cut plan's impact on home buying, selling and owning has undergone scrutiny by the National Association of Realtors, the National Association of Home Builders, several national mortgage companies, real estate websites - Zillow and Redfin, and even the conservative Tax Foundation.
Lawrence Yun, chief economist for the National Association of Realtors, summed it up this way: "... you'll begin to see home buyers hesitate or scale down which properties they purchase... The upper end of the market may completely stall."
In early November, Forbes magazine reported that "Real estate professionals have been quick to cry foul, arguing the proposals would eliminate the tax incentive to buy, turning America into a nation of renters and putting pressure on home values." It quoted Vishal Garg, CEO of Better Mortgage, an online mortgage lender focused on Millennials, as saying, "This tax plan would turn America from a nation of property owners into a nation of tenants renting from private equity-backed landlords... Why should corporate landlords get the deduction if your consumer home buyer can't?"
While both Senate and House versions are voluminous, analysts dissected the potential impacts on home ownership, and Forbes offered a summary in its report What The Republican Tax Bill Means For The Value Of Your Home -
- A reduction in the amount of mortgage interest that can be deducted.
- A new cap on property tax deductions.
- Limits to the capital gains exemption used by homeowners when they sell.
Prior to the bill's passage in both houses, Forbes reported from a "half-empty glass" perspective by noting that currently, "homeowners can claim as an itemized deduction interest paid on mortgages valued up to $1.1 million used to acquire or improve a first and/or second home," but, although the tax-cut bills maintain "the current cap for existing homeowners, but slashes it to $500,000 for homes purchased in the future." Forbes also notes, parenthetically, that "The bill would also limit the mortgage interest deduction to one principal home, ending any deductions for vacation homes."
However, the "glass" became "half-full" in other media reports after the Dec. 19 vote.
For example, CBS News, the Los Angeles Times and Bloomberg News reported just hours after the final House vote that there are steps individuals can -- and should -- take before the end of 2017 "to maximize new advantages and minimize the potential hit from other changes," as the LA Times noted.
1. If Possible, Pre-Pay Your 2018 Property Taxes
Most people pay their property taxes in two installments -- half by early December, half in April. But there may be a tax advantage to paying that second half before the end of 2017. Here's why: Currently, there is no cap on the annual deduction for state and local income, sales and property taxes. The new tax law, however, would limit couples filing jointly to a total of $10,000 annually, and it prohibits people from prepaying 2018 state and local income taxes this year -- but doesn't specifically rule out paying that second half now, and claiming it all as a deduction come April 15.
"The bill is pretty clear that you will not be able to prepay, even if you could, your income taxes," said Darien Shanske, a tax law expert at the UC Davis School of Law, told the LA Times. "But, it's silent about property taxes."
Of course, the issue may be a moot point if taxes are paid through an escrow account handled by the bank or mortgage provider.
2. Make an extra mortgage payment
The number of taxpayers who itemize deductions on their annual returns may sharply decline. Due to the tax overhaul, the standard deduction doubles for those who don't itemize -- from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for couples filing jointly.
And those hikes may result in far fewer people opting to itemize on their 2017 federal tax returns. So, several financial experts say it might be worth considering paying January mortgage payments while 2017 is still valid.
Greg McBride, chief financial analyst for financial information website Bankrate.com, told the LA Times on Dec. 19 that doing so would allow homeowners to deduct an extra month of mortgage interest if they don't end up itemizing because of the higher standard deduction.
3. Be aware of the new mortgage "wrinkle"
Currently, interest on new mortgages up to $1 million is deductible for those who itemize, but the new mortgage ceiling will be reduced to $750,000 (and end deductible interest on home equity loans).
Justin Fox, in an Opinion piece posted by Bloomberg News Dec. 19, wrote, "it's almost certainly good economic policy," because "there's just no good reason to give tax subsidies to upper-middle-class home buyers, and" - a good reason not to. The existing deduction "encourages people to take on more debt than they otherwise would, drives up housing prices, and favors buyers over renters." And, he adds, "It would put downward pressure on home prices in expensive cities and suburbs, but (1) the effect is likely to be modest and (2) downward pressure on home prices in very expensive places isn't necessarily a bad thing."
Recently, the National Association of Realtors (NAR) expanded its website to include an exhaustive forum on tax reform, beginning with this summary:
"For more than a century, American tax policy has recognized the value of home ownership to American middle-class wealth creation, strong and stable communities, and as a driver of our nation's economy. Home ownership is not a special interest, it is our common interest, yet through misplaced priorities in tax reform, Congress would place the American Dream further out of reach for millions of Americans at a time when our home ownership rate is at a 50 year low. In short, the Tax Cut and Jobs Act is a serious step in the wrong direction."
The NAR's site also included an email template for its members to send to Congress, telling senators and representatives to "strengthen the protections for consumers and homeowners" by retaining mortgage interest deductions on federal tax returns as well as capital gains exemptions, and adding that "These provisions would add needed protection to current and future homeowners and strengthen the ability of qualified American families to purchase a home."
Recently, the print and online magazine Consumer Reports -- a publication by the nonprofit Consumers Union -- featured an article headlined, "How The Tax-Cut Bills Could Affect Home Ownership. It concluded that, "If you're planning to buy a home ... where real estate is pricey and taxes are high, you could soon snag some bargains... If you're planning to sell, you could face some pain." It added, "...the tax changes could make moving more costly, prevent you from borrowing against your home for certain expenses, and make it harder for you to recoup your losses after a major home catastrophe." It adds that both Senate and House versions would "limit the deduction of state and local taxes to $10,000 in property taxes," and the House version limits "the deduction of interest on new mortgages to loans of $500,000 or less. Buyers of higher-priced homes may balk at taking on mortgages beyond that limit because they will no longer get the tax break."
Nicole Keading, an economist at the Tax Foundation, told Consumer Reports, "We can't just look at the impact on those owning the homes." While it's estimated that home values in high-tax areas could drop by 2 to 3 percent in the short term, Keading sees a silver lining. "Any decrease in home values means it's now cheaper for first-timers to buy a home."
But Aaron Terrazas, senior economist at the real estate website, Zillow, predicted that lawmakers in high-tax states will likely respond by lowering taxes or slowing the growth of local taxes to continue attracting employers and workers. But, he also admits short-term price drops -- which he estimates at around 10 percent -- will lure buyers. "We won't know all the consequences until a year or two after the bill goes into effect," he told Consumer Reports. "There is so much up in the air right now, it's a time when it's important to be careful. This should give buyers pause."
Nela Richardson, chief economist at the real estate website Redfin, added, "The worst-case scenario is that tax changes reduce the incentive to own. Prices are high, mortgage rates are set to increase, and tax changes may make owning a home more expensive in some markets. This could change the rent-own equation for first-time buyers."
Richardson also cited a provision in the House bill that "disallows deduction of interest from a second home," and projects that the change could negatively affect markets in Southern Florida, California, and along the East Coast of the U.S. "Those markets are vulnerable already," she noted.
Concerning the proposal to reduce the amount of mortgage interest that can be deducted, Forbes magazine explained that, "As the law stands now, home owners can claim as an itemized deduction interest paid on mortgages valued up to $1.1 million (when) used to acquire or improve a first and/or second home." But that would change -- the proposed legislation "maintains the current cap for existing homeowners, but slashes it to $500,000 for homes purchased in the future. (The bill would also limit the mortgage interest deduction to one principal home, ending any deductions for vacation homes.) This means a home buyer paying 4% interest on a $1 million mortgage would be able to deduct just $20,000, as opposed to the current $40,000."
And while the proposals reduce the deductions for individual home owners, the Forbes report says "it exempts real estate investors from a new 30 percent limit on interest deductability for businesses." It quotes Vishal Garg, CEO of Better Mortgage, an online mortgage lender focused on Millennials, as saying, "This tax plan would turn America from a nation of property owners into a nation of tenants renting from private equity-backed landlords... Why should corporate landlords get the deduction if your consumer home buyer can't?"
On its website, the NAR says that, "By nearly doubling the standard deduction while eliminating most itemized deductions, the (proposed) bill would destroy or at least cripple the incentive value of the mortgage interest deduction (MID) for the great majority of current and prospective home buyers, and sap the incentive value of the property tax deduction for millions more. The direct result of these changes would be a plunge in home values across America in excess of 10 percent, and likely more in higher cost areas.
And Granger MacDonald, chairman of the National Association of Home Builders, told Forbes that "The House Republican tax reform plan abandons middle-class taxpayers in favor of high-income Americans and wealthy corporations. "The bill eviscerates existing housing tax benefits by drastically reducing the number of home owners who can take advantage of mortgage interest and property tax incentives." MacDonald added, "By undermining the nation's longstanding support for home ownership and threatening to lower the value of the largest asset held by most American families, this tax reform plan will put millions of home owners at risk."
But Redfin's Richardson told Consumer Reports that, even if all of the proposed changes survive, they won't change the overall attractiveness of owning a home; they just make the decisions around buying, selling, and staying put more complex. He said, "Tax reform has introduced some new questions for buyers and sellers, but fundamentally, real estate continues to be a solid long-term investment. Because everyone's personal financial situation is different, consulting a tax professional is the best way to get definitive advice about your specific situation. And don't panic."
Here's how Southeast Discovery views the Republican Tax Plan will likely impact facets of the real estate markets --
1. High property tax states like New York, New Jersey, Connecticut, Illinois, Wisconsin and California will continue to see outward migration. Residents of these states, especially retirees who are transitioning to a fixed income, will decide if it makes financial sense to remain in their home state where they are paying $15,000 in property taxes a year, when the cap on property tax deductions for an itemized return in the new plan is $10,000 per year.
2. Americans in all stages of life will further evaluate where they choose to live. If they can work in Raleigh, North Carolina vs Chicago, Illinois - they are going to evaluate what each location offers them and their families such as A) the quality of life and crime rates of each area B) the cost of housing which includes property taxes C) housing appreciation prospects D) affordability of education for their children E) climate preference and outdoor activities.
3. Real estate buyers are going to factor in the new tax laws when purchasing real estate. For example, due to the reduction of the mortgage ceiling deduction going from $1M to $750,000 for those filing an itemized tax return, this may very likely put pressure on higher end real estate.
4. Home equity interest no longer being deductible under the new tax plan will deter home owners from automatically dipping into their home's equity to pay for home improvements. Hence, home owners will think twice about performing home improvements if they don't have the cash to pay for them.
At SoutheastDiscovery.com, we've been intimately involved with virtually every facet of the home-buying experience for almost 15 years. And we keep abreast of both federal and state laws as they apply to home ownership and purchase. Have questions? Contact us at email@example.com or call 877.886.8388.