THE REAL ESTATE ATMOSPHERE AND THE POSSIBLE IMPACTS OF THE NEW TAX
Real estate and owning one’s own home is widely
recognized as the middle-class borrower’s best path to create wealth. Home
ownership, accompanied by the increase in owner equity, is credited with being
the vehicle fueling some of the current economic growth.
Our real estate environment has had its challenges. General
lack of sufficient inventory has resulted in home value acceleration resulting
in the unusual increase of both home values and interest rates at the same
time. At the same time, there is a concern regarding potential buyer
The introduction of more creative loan options, referred to
as non-QM loans, relying upon more flexible qualifying guidelines accompanying
variable interest rates, pre-payment penalties and short terms remind some of
the loan environment that caused the recession from which we are only now
In spite of the Federal Reserve’s (The FED) intent to
gradually raise interest rates in 2018, home mortgage rates could still remain
historically low. Typical home loan
options have stabilized and qualifying guidelines have generally become more
All in all, the real estate environment has been good and
2018 expectations are encouraging.
Tax Legislation Goals
new tax legislation will affect millions of persons and businesses. Its
immediate affect is anticipated to grow the economy via job creation and wage
legislation is touted to increase both jobs and wages. Affordability is
influenced by wage growth. As wages increase would-be home buyers can
presumably afford the appreciating values. It is suggested that consumer
confidence accompanied by the lower taxes and potentially higher wages will
promote home purchasing. On the other hand, critics suggest that the future
growth estimates are exaggerated and that the lower and middle class will not
benefit as anticipated. But for the present, the home market appears to be
Rates: While wage increases are
good for workers, the FED generally views this as inflationary. The FED
anticipates raising rates two additional times in 2018, likely a quarter
percent each adjustment as their way to curb any inflationary impacts. The FED
controls short term rates which normally affect equity line loans, auto loans,
credit cards, etc. but increases can be reflected eventually in long term
mortgage rates as well.
are risky and it is likely too early to determine the overall effect the tax
legislation will have in the real estate arena although unintended consequences
too often accompany sweeping legislation. With that in mind, the following are
some elements of the new legislation and some possible outcomes.
Tax Legislation Affecting
Deduction Increase: The
increase of the standard deduction to $12,000 and $24,000 for individuals and
married couples respectively eliminates, for many home owners and buyers, the
advantage of the old interest and tax deductions. While potentially simplifying
tax filing, critics fear the reduction in the incentive to purchase real estate
will significantly impact sales, especially among millennials
who are viewed as reluctant homebuyers already. The discussion of rent vs buy will become significant.
Line Interest eliminated: These
loans have become an easy way to tap into home equity. The elimination of the
interest deduction on such loans may discourage their use? Still deductible if
funds are used for home improvements but we don’t yet know the paper work
combination of property taxes and any income or sales tax deductions are
limited to a total of $10,000 which is anticipated to affect mostly higher
priced homes. This affects personal residences and qualified second homes but
does not apply to investment property.
Unreimbursed Employee business expenses: Including
also tax preparation and investment management fees this exclusion will affect
real estate licensees, teachers, mechanics, police, etc.
& Entertainment Expenses: No
longer deductible although 50% of food & beverage expense is still allowed.
Losses: A casualty loss (fire, flood, theft) will
be deductible only if the loss is attributable to a declared national disaster.
Personal casualty losses will no longer apply.
Mortgage Interest: The
legislation specifically references personal residences and qualified second
homes and is deductible only to the extent of $750,000 of acquisition
indebtedness. Investment property taxes and interest does not appear to be
affected. We don’t yet know to what extent the incentive to purchase
higher priced homes will be affected.
Mortgage Insurance (PMI): While
originally excluded, the IRS reinstated PMI as a deductible item. This is
unlikely to impact the number of borrowers selecting the Lender Paid Mortgage
Insurance option as it tends to reduce the monthly payment at qualification
Gains Provisions: The
$500,000 and $250,000 capital gains exclusion for married couples and
individuals respectively is retained. The home must be used as a personal
residence for at least two of the last five years at sale time. The rules are
confusing and require professional assistance.
Step Up Basis: The
ability to inherit property and value it at the increased “stepped
up” basis that, in turn, allows the extraction of all the equity without
taxes, is important for estate planning purposes. This benefit that affects
personal and investment property is retained in the new legislation.
Tax Deferred Exchanges: Benefits
retained but “like kind” now includes only “real”
property. Cannot exchange cars, yachts, etc.
Gift Taxes: This was retained as a deduction and the
amount per person in 2018 was increased to $15,000.
Loan Interest: The
loss of this deduction may result in those already burdened with high student
debt and feel limited in their home purchasing power will be further unable to qualify
or become disinclined to purchase. Student loan debt forgiveness retained for
those in public service programs or upon death or
Moving Expenses: No
longer deductible except for some military personnel.
The information above is our
“understanding” of the provisions in the new tax legislation. It is
likely to change as Congress addresses adjustments. Please consult your tax
advisor regarding your personal and specific tax situation(s as the above is for information purposes only and should not
be relied upon for tax planning purposes
Final Comment: We
all need to pay attention to our careers and recognize that it is often the
unanticipated consequences of an action (like a hurriedly passed tax bill) that
can cause difficulties in the future. But our real estate industry is resilient
and home sales and purchases will continue!
Taxes: the amount excluded from estate
taxes was increased from 5 million to 11 million per person. Critics indicate
that this benefits only 5500 most affluent families and is seen by some as
mainly a gift to the rich.