Posted 12/14/2017

by Erik J. Martin

Erik J. Martin has written on real estate, business, tech and other topics for Reader's Digest, AARP The Magazine, The Chicago Tribune and his blog, Martinspiration.

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The 2017 tax reform bill and real estate: what it means if you’re buying a home

Erik J. Martin

The Mortgage Reports Contributor

Real estate industry awaits final tax reform bill

One of the perks of buying a home is taking tax breaks as an owner. But the expected tax reform bill may limit your ability to do so. And it’s got many people in real estate concerned. Consider that only 29 percent of Americans overall support these proposed tax changes, per Gallup polling. What will happen with the tax reform bill and real estate?

Why does tax reform legislation matter? Because it can majorly affect housing issues that matter to you.

“Administration policy that will have the biggest effect on mortgage rates and real estate center around economic policy.  Pro-growth strategies such as tax reform will have more impact on the housing market in the coming year than anything else,” says Dr. Clifford Rossi, professor of finance at the University of Maryland.

The House and Senate each recently passed their own tax reform bills. Now, they need to work out the differences in each of their plans in order to create a single bill for President Trump to sign.

There’s good news and bad news for home shoppers in the tax reform bills. That’s why it’s important to know what’s being proposed and how you may be affected. This can help you make a more educated choice as a consumer. Learn the facts. Get advice from the pros. And contact your members of Congress to push for the issues that matter to you.

New mortgage interest deduction limit

The first major change that could make it into the final tax bill is a new cap on the mortgage interest deduction (MID). Currently, the MID cap is $1 million. But the House bill cuts that amount in half—to $500,000 max on a newly bought home.

“This makes buying a home with a price tag in excess of $500,000 more expensive,” says Robert Johnson, president/CEO of The American College of Financial Services.

“It will have the effect of limiting supply on homes selling for above $500,000,” Johnson adds. “This is because many people will prefer to stay in their current home and keep their current mortgage. With fewer sellers having homes with price tags above half a million, that could actually serve to increase prices on homes in that range.”

A new property tax max

The second major change proposed is an end to deductions of most state and local taxes (SALT). Around one in three Americans itemize their tax deductions; nearly all these folks claim the SALT deduction. But the final tax bill may to reduce SALT deductions to a max of $10,000. This deduction would only apply to property taxes.

“Eliminating or reducing the amount of tax deductibility of SALT payments makes home ownership more expensive. And it reduces the incentive to purchase a home,” notes Johnson.

It also makes it harder to buy and own in states with relatively high SALTs, like New York, California and New Jersey.

“This will hurt high-cost states. If it passes, I expect to see home prices to still grow, but at a much slower rate in higher-cost states,” says Ralph DeFranco, global chief economist with Arch Mortgage Group.

Tax reform bill and real estate: SALT in the wound

Redfin recently polled buyers who are under contract or plan to buy a home in the coming year. One out of three (32 percent) would think about relocating to another city or state if they could no longer deduct SALT and property taxes.

The number was even higher in California (37 percent).

“Eliminating this deduction is analogous to pouring SALT on a wound for California buyers,” said Redfin chief economist Nela Richardson in a prepared statement. “Why? Because buyers are already confronting severe inventory shortages and high home price appreciation.”

When it’s time to sell

One other real estate-related item proposed in the tax bills should concern first-time buyers: the tax-free capital gains exclusion.

Under current rules, a seller can exclude a max of $500,000 ($250,000 for single filers) of gain on their home sale. You need to live in your house for two out of the previous five years to qualify.

But the final tax reform bill may require you to reside in your home for five of the last eight years. This would be a problem for those who need to sell quickly due to a divorce, job relocation or otherwise.

Why housing experts aren’t happy

National Association of Realtors president Elizabeth Mendenhall recently voiced concerns about the tax changes in a prepared statement.

“While there are some winners in this legislation, millions of middle-class homeowners would see very limited benefits, and many will even see a tax increase,” she said. “In exchange for that, they’ll also see much or all of their home equity evaporate as $1.5 trillion is added to the national debt and piled onto the backs of their children and grandchildren.”

Mendenhall added that the tax perks of owning a home “are baked into the overall value of homes in every state and territory across the country. When those incentives are nullified in the way this bill provides, our estimates show that home values stand to fall by an average of more than 10 percent, and even greater in high-cost areas.”

Seeing a silver lining

And therein lies a bit of good news. Many renters and move-up purchasers are iced out of the market due to rising home prices. But slicing more than 10 percent off the average home price would make buying less expensive for them and others.

“A depressed real estate market would make home ownership more affordable from an initial cost standpoint,” says Johnson.

However, Johnson says, “over the long run, a new homeowner would face increased costs” (if the MID cap and SALT cuts go into effect).

What you can do

If you feel strongly about any of these proposed tax changes, make your voice heard, but do it quickly. The final vote on the final bill could come as soon as December 18.

Contact your Senate and House representatives in Washington. Let them know what you’d like to see in the final tax bill.

Also, talk to a real estate agent and your tax planner and ask their advice. They can help guide you into making a smarter choice that may involve paying less taxes.

Erik J. Martin

The Mortgage Reports Contributor

Erik J. Martin has written on real estate, business, tech and other topics for Reader's Digest, AARP The Magazine, The Chicago Tribune and his blog, Martinspiration.

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.

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