The New Tax Bill and What it Means for Homeowners, Homebuyers, and Real Estate Professionals
Hope everyone is enjoying the holiday, and looking forward to the New Year! It's been another interesting/ volatile few months in terms of the bond market and interest rates, yet rates remain really low, and even if they go up to 7-8% (unlikely), it will 9/10 make more sense to buy a home vs. renting a home and throwing your money to someone else's mortgage. However, the most significant event that happened most recently is the passing of the Tax Cuts and Jobs Act. The bill has some profound impacts in just about every aspect of homeownership, and is going to be really important to understand for current homeowners, prospective home buyers and real estate professionals alike.
The National Association of Realtors (NAR) has been closely monitoring and working diligently to ensure that the tax bill didn't completely undermine the tax incentives of homeownership/real estate investment, and were largely successful in their endeavor. Many of the positive changes stemming from the first draft to the final bill were the direct result of their engagement and its members not just in the last few months, but over the last several years.
While there is still concern that the structure of the final bill will diminish the tax incentives/ benefits of homeownership in certain niche markets, the advocacy of NAR helped gain some significant improvements throughout the legislative process, and will benefit many homeowners, buyers and investors.
Why the concern?
Despite NAR's efforts, they are still projecting slower growth in home prices of 1-3% in 2018 as low inventory will continue to hamper price gains. Some niche markets (particularly high cost, higher tax areas) will likely see price declines as a result of the legislation's new restrictions on the mortgage interest deduction along with state and local taxes.
Aside from that, here are the key takeaways you should pay attention to:
1.) Tax Rate Reductions (See attached for updated brackets for both single and joint filers):
-In the draft of the bill, congress was aiming to reduce the number of brackets from 7 to 3. Instead of having 10%, 15%, 25%, 28%, 33%, 35% and 39.6%, they wanted to change it to 12%, 25% and 35%. The final bill retains the seven brackets, but the income thresholds (see attached) and the percentiles are changing to 10%, 12%, 22%, 24%, 32%, 35% and 37%.
-This provides generally lower tax rates for just about all tax filers with a few exceptions in the higher brackets, and will result in $1.2 trillion cuts over the next 10 years.
- The final bill also retains the current- law maximum rates on net capital gains (good for real estate investors)- of 15% max rate, but 20% for those in the highest tax bracket (now 37%), and 25% rate on "recaptur of depreciation from real property"
2.) [Capital Gains] Exclusion of Gain on Sale of a Primary/ Principal Residence:
-A significant victory for the housing industry saw that the current law is retained where the amount of time a homeowner needs to live in their home in order to be excluded from capital gains stays at 2 out of 5 years, and that higher brackets don't lose the benefit altogether. The House bill aimed to change this to 5 out of 8 years, and would have also completely phased out the exclusion for single taxpayers making above $250K and married tax payers making more than $500K.
3.) Mortgage Interest Deduction:
-Another victory for the housing industry came with the Mortgage Interest Deduction (MID) rule. The House bill aimed to lower the cap from $1M to $500K, and would completely eliminate the deduction benefit on second homes. The final bill only lowers the cap to $750K of deductible mortgage debt for new loans taken out after 12/14/2017. Current loans up to $1M are grandfathered and are not subject to the new $750K cap. The second home interest deduction still exists with the final bill as well.
-Long story short.... unless you're looking for a mortgage that will be greater than $750K, this will have absolutely no impact on you as a potential homebuyer.
-Homeowners may also refinance existing mortgage debts of up to $1M and still retain the deduction benefit, as long as the new loan does not exceed the amount of the mortgage being refinanced. So if you're looking to do a "cash out refinance" where you access your equity to pull cash out/ consolidate other debts, the new mortgage debt would not be deductible in that scenario if the new debt exceeds the $750K cap.
-The final bill repeals the interest deduction on home equity lines of credit, or HELOCs. However, interest is still deductible on HELOCs (second mortgages) if the proceeds are used exclusively to improve the property value (home improvements).
4.) Deduction for State and Local Taxes:
-When the tax bill was first introduced, the deduction for state and local taxes would have been completely eliminated. The final bill still allows an itemized deduction of up to $10K for the total of state and local property taxes as well as income / sales taxes.
5.) Standard Deductions:
- Current law had a standard deduction for single filers of ~$6,000, and for joint (married) filers of $12,000. The new bill doubles both of these standard deductions to $12,000 and $24,000 respectively.
*********.....What this means (please refer to the numerous asterisks below for disclaimer):
-Under the new tax laws, when you're filing your taxes (for 2018 income in 2019), and for example, you make $50,000 salary per year. Under the current tax law (not new) you can only claim a standard deduction of $6,000, which would bring your taxable income to $44,000 (still in the 22% tax bracket). Now, the new standard deduction is $12,000, so your new taxable income is $38,000 (which is now in the 12% bracket). In this circumstance, if you're a single tax filer, and you're making $50,000 salary with no additional income, you can now deduct yourself standard into a lower tax bracket, and pay just about 50% less taxes per year (22% to 12%). A similar scenario for married couples (new standard deduction of $24,000) can be put together similarly.
******* I am not a tax professional/ adviser/ CPA etc. If you would like a referral to one, please get in touch with me so I can defer you to them to provide more elaborate insight on the new tax laws, and what it means when you file in 2019. *********
On a high level outlook, these are the five main takeaways to pay attention to. Please don't hesitate to get in touch to discuss in further detail / other important aspects of the tax bill and how it might impact you as a homeowner/ buyer, most notably the repeal of personal exemptions vs. the updated child/ dependent credit.
Hope to hear from you soon!
Dylan Hallsmith, CMPS
Mortgage Loan Officer
First Home Mortgage
NMLS ID# 1379767
c. (413) 512-1933
o. (240) 479-7666