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NEW RULES FOR THE ELIMINATION OF PMI

Updated:         May 22, 2018

THE REAL ESTATE ATMOSPHERE AND THE POSSIBLE IMPACTS OF THE NEW TAX LEGISLATION

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 affordability. 

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 recovering.  

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 flexible.

All in all, the real estate environment has been good and 2018 expectations are encouraging.

Tax Legislation Goals

            The new tax legislation will affect millions of persons and businesses. Its immediate affect is anticipated to grow the economy via job creation and wage increases.

                Job Creation:     The 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 fairly solid.

                Interest 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.

                Predictions 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 Real Estate

 

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.

            Equity 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 required.

            Property taxes:                      The 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.

            Business & Entertainment Expenses:          No longer deductible although 50% of food & beverage expense is still allowed.

            Casualty 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.

            Home 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.

            Private 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 time.

            Capital 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.

            1031 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.

            Student 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 permanent disability.

            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!

 

            Estate 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.

               

 

 

 

 

 

 

 

 

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