The Tax Cuts and Jobs Act Brings Many Questions
On December 22, 2017, the President signed The Tax Cuts and Jobs Act into law, and sent CPAs, tax consultants, and the real estate community into a frenzy of wild speculation as to what effects this new law would have on the real estate market, home values, and our country as a whole. The good news is that upon further review of the actual law, much of the panic over its impact on real estate is beginning to subside. Here's a quick look at some of the key variables:
Before We Begin
Any discussion of tax laws by someone who is just a licensed real estate professional (and not a CPA, attorney, or economist) must include a proper caveat that this article is not intended as specific legal or financial advice - - that advice should always come from the proper professionals in those respective fields. This is, however, a real estate professional's take on what the new tax law means to our industry and the home buyers and sellers whom we serve. This much is clear: Now that this Act has become law, even professional CPAs and others are not fully versed in all of its complexities and what it may or may not ultimately mean.
Perception Is Realty...Or Is It?
Much confusion about the new law stems from the fact that both the Senate and the House of Representatives supported or rejected certain proposed elements as the law was being created, debated, and finalized. There are differences between much of what was being reported in the proposed versions and what is actually in the final law itself.
Here's a look at 3 key elements as they affect the real estate market:
Home Sale Tax Exclusion
After much press about this critical tax shelter being modified, the final version of the Act left this important exemption alone, without change. The IRS allows homeowners who meet certain ownership and usage guidelines to exclude up to $250,000 from capital gains tax (up to $500,000 for married couples) when they sell their principal residence. The 'old' (and still current) rule was that the owner must have lived in the property for a minimum aggregate of 2 years over the past 5 years. The proposed change would have increased this to a minimum of 5 of the past 8 years, but fortunately that did not make the final version of the law.
Mortgage Interest Deduction
Regarding the deduction of Mortgage Interest, there was a change from last year and it may have an effect on higher priced homes and markets, but there are some potential balancing factors to consider.
The 'old' law allowed for households to write-off up to $1,000,000 in mortgage interest indebtedness for their primary residence and, in some cases, second homes. Your existing mortgage is grandfathered under the old rules.
What has changed is that any new mortgages created since the passing of the Act are now limited to a maximum $750,000 mortgage interest write-off.
Here's where the potential effects of this change are uncertain. It could be that home buyers who are purchasing in the $900,000 to $1.2M price range will consider the loss of potential mortgage interest write-off when buying (purchases over this level would typically have been capped at the prior $1M mortgage interest limit anyway), but since most of these high-income households will see other tax savings due to the new law's lower income tax brackets, this effect may be negligible.
What is certain is that people generally don't base the home that they buy solely on the potential tax benefits over and above other factors (i.e. - location, suitability for their family, features that they need or desire, etc.), so it doesn't appear that the sky will begin falling anytime soon due to this change. But, it is worth watching this segment of our local marketplace closely as 2018 progresses.
Also impacted is the interest paid on Home Equity Lines Of Credit ("HELOC") which was a deductible item in many cases. The bottom line here is that under the new tax law, deductions for interest paid on HELOCs are no longer allowed. This is a departure from the past and not be be confused with true second mortgages (2nd trusts), which may actually still be deductible. (Your sleep-deprived CPA can give you specific guidance once he or she finishes reading and digesting the entire law!)
Pass The S.A.L.T.
This change will undoubtedly have some effect and impact on a large number of homeowners in our marketplace: State And Local Taxes, or S.A.L.T.
Under the new law, taxpayers are limited to claiming up to $10,000 per year in their State and Local Taxes on their Federal returns. This includes Property Taxes which means Real Estate Taxes. And in Northern Virginia, Real Estate Taxes alone can be the lion's share of this new limit for many upper-end homeowners. Even those in more modest homes may find that this change limits the total S.A.L.T. write-offs that they are accustomed to, however, many taxpayers will simply claim the new, higher standard deductions under the new law, so again this effect may not be as harming when taking the total tax law's effects into account.
Also, consider this: The original proposed plans would have eliminated all S.A.L.T. deductions entirely, so this limit could be viewed as a positive thing for homeowners in the lower price ranges in our otherwise expensive local market. Again, higher standard deductions for all taxpayers provide some relief to this change.
Some (Really) Good News
Any discussion about what the new tax law means for the future inevitably becomes a political discussion. Much gloom and doom has been reported by various opponents to the changes as they were being communicated (or leaked!).
But several National economists are striking a slightly different tune and projecting good things overall for our economy - - and the real estate industry - - in both the near and long term. Price appreciation across the country is trending upward at a rate of 6% to 7% in hotter markets and 3% to 4% in the rest. This is a welcome sign of a very healthy housing market overall.
In fact, industry giants Fannie Mae, Freddie Mac, The National Association of REALTORS, and The Mortgage Bankers Association are all projecting home sales to be on the rise over the next 12 months. Most experts are expecting these trends to negate any short-term negativity and prevent any actual decrease in home values.
Of course, like with any change, time will tell.
Have questions about the Home Buying or Home Selling process? We are here to help, just as we have guided and assisted hundreds of Northern Virginia buyers and sellers!
Remember, we help our SELLERS to get "The Most Money For Their Home", and our BUYERS to get "The Most Home For Their Money" - - and we can do the same for YOU!
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The Art of Rel Estate, LLC
CENTURY 21 New Millennium
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