On September 27, 2017, President Trump vowed to bring us a simpler tax code that would cut taxes for the middle class, and to bring back the wealth that has left our country. When that tax plan was revealed in October, the housing industry was shocked to see that the mortgage interest deduction was being eliminated. For years lauded as part of the path to homeownership, the deduction has been an essential part of the U.S. tax code for generations. However, that’s all about to change. What does the repeal mean for real estate agents?
First, it is important to remind anyone who may be having second thoughts about buying a home that while the deduction is being eliminated, the standard deduction has been increased. For a home buyer or family with a combined income of $75,000 to $99,999, the cost increase from losing the mortgage interest deduction in favor of the standard deduction will be $210.
While the press around this point of the tax code talks about how the middle class will be decimated, the reality is that the mortgage interest deduction encouraged homebuyers to spend more money; however, it did not encourage more people to buy homes. So while you may be selling smaller spaces, in different neighborhoods, or to different demographics, you will continue to see homes being bought and sold.
The majority of people who benefitted from the mortgage interest deduction as it is currently written were people who owned real estate valued at more than $500,000; they will continue to see a benefit from the deduction in the new version of the tax code. In the short term, lead generation should focus on those who are looking for higher value pieces of property.
Current rental property owners stand to benefit the most from this change. Because their deductions are business expenses rather than homeowner expenses, they will not lose out on the deductions associated with homeownership. They may also find a higher demand for rental properties, especially those homes with dollar values just below $500,000; if people are hesitant to buy for a while, rental rates will increase.
Those who will suffer the most will be those who own multiple properties. With the reduction in the mortgage interest deduction, even with the increase in the standard deduction, tax rates will make owning two homes less cost-efficient. When these clients come to you in a panic wanting to sell, encourage them to consider turning their second home into a rental property; the write-offs associated with business expenses will help stabilize their tax burden.
First-time homebuyers may be scared to move forward on a purchase if they read the negative press surrounding this change to the tax code. Either encourage your clients to sit down with a tax professional and compare the differences, or meet with a tax professional yourself to put together a document that illustrates the changes to the current tax code. A simple one-page brochure will be useful to both of you and your clients.
Finally, sellers may find themselves frustrated at the inevitable slowdown in housing sales. While this is not an actual destabilization of the housing market, the change to the tax code will have a short-term impact on home sales (and new home construction). It is important to remember that as people become more knowledgeable about the change to the tax code, home sales will pick up again. Encourage frustrated sellers to either become renters or postpone a move for six to twelve months until people see the impact on their bottom line. Once people realize that they are not hugely impacted by the change in the tax code, the market should rebound.
Trying to build your business around an inevitable slowdown can be difficult. However, with proper planning, honing of your sales pitch, and improvements in how you connect with leads, you should be able to weather this storm and move forward with your business.
Eric Lawrence Frazier, MBA
President and CEO
NMLS #461807 CalBRE #01143484
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