It hasn't even passed yet, but many are weighing in on whether it would help or hinder the real estate market.
The key takeaways of the bill as they relate to real estate are:
- a $10,000 cap on the deduction of property taxes
- lowering of the the mortgage interest deduction cap from $1 million to $500,000
- You will have to stay in your home longer to receive the capital gains exemption (must live there 5 of the past 8 years.)
- eliminates the deduction for moving expenses.
- The bill preserves certain advantages for owning investment property
The $10,000 Cap
High tax property areas (such as Winnetka and the North Shore) will be hit especially hard by this. Some might think it's not a big change - but they may be payng much less than $10,000 per year in property taxes. Everyone reading this that lives in the North Shore knows we have some of the highest rates in the country.
Mortgage Rate Deduction Cap from $1 million to $500,000
According to industry leader Inman News, "Owning a high-priced home is going to be a lot more expensive under the new law." But the catch is that the bill only affects new mortgages, leaving the current rules in place for existing homeowners. From Forbes: ". . . this could create a disincentive to move." And if one property owner stays put, then the person who would have bought their house stays put, and so on.
Capital Gains Extension Relating to Time Living in Your Home
Currently, if you've lived in your primary residence for 2 of the past 5 years, you can exempt up to $250,000 ($500,000 for married couples) of your capital gains. The new law would make you live in your home for 5 out of the past 8 years to receive the exemption. And you could lose the deduction if you earned too much. Inman News argues that not many people would realize a gain of $250,000 in 2 years but changing it to 5 years is just another disincentive to move.
Elimination of Moving Expenses
You can currently deduct this expense if your move is job related. It most likely won't stop anyone from moving, but it's another example, according to Inman, of depressing the incentive to move.
Investment Property Advantage
While cutting back on deductions for individual homeowners, real estate investors can still deduct the interest on their loans and property taxes without any cap. The plan also exempts real estate investors from a new 30% limit on interest deducibility for businesses. From Forbes:
"This tax plan would turn America from a nation of property owners into a nation of tenants renting from private-equity landlords."
In another Forbes article by Jeffrey Dorfman, a different analysis is given. He says that the real estate industry will be just fine under the proposed reforms. He thinks the 3 main changes (first 3 listed above) "somewhat" limits the homeowner's tax advantages. According to Dorfman, only 6% of all mortgages are for $500,000 or more - or 2.5% of all American households. And no change is proposed for existing mortgages.
He concedes that there are locations where a significantly higher number of home buyers will be impacted. Yes, like anyone hoping to purchase in Winnetka, Wilmette, Kenilworth, Glencoe, Northfield, and several other high-end real estate markets. It's true that homeowners might pay lower overall taxes in the proposed overhaul, but will that offset the impact that the changes will have.
And my advice as a real estate agent. Clearly, every individual should consult with their CPA to determine how the proposed changes may impact their specific siuation. There will be many more revisions to the proposed tax bill so ultimately we'll have to wait and see what the final version holds.