Friday January 5, 2018 by The Mettle Group
Disclaimer: This guide is not meant to be a resource for tax advice but instead a resource for basic information concerning only certain aspects of the new tax code and how they may impact the real estate market. You should get tax advice from your accountant or tax preparer who will explain how the entire tax code will affect your personal return. This information comes immediately after the new tax code became law. Some of the information may be revised as the analysis of the new law evolves.
Taxes are complicated and unfortunately Trump failed at simplifying the tax code such that we could file our taxes on a postcard (his initial goal). That would have been a massive win, but I believe the vast majority of Americans come out ahead with this new plan.
My goal here is to analyze the changes in broad strokes and analyze if the tax reform changes are positive or negative on housing prices (I also failed to fit this analysis on a postcard).
Taxes for most single and married couples are going down by about 3%.
If you and your spouse’s income is $100k, you will pay about $250 less per month in taxes. If your combined income is $250k, you will pay about $625 less per month in taxes. If your combined income is $500k, you will pay about $1,083 less per month in taxes.
Certainly looks like a win for most Americans in terms of the amount of cash they will keep versus pay in taxes. Common sense tells me this change is positive for housing, as Americans now keep more of their earnings, which can be used to pay down debt, increase savings and investment, or cover their mortgage payments each month.
The maximum corporate tax rate is going down from 35% to 21%. The reform makes it more advantageous for multinational corporations like GE, General Motors, Google, Microsoft, and Apple, to bring capital back to the U.S. for investment.
Many of the sales and profits from oversees sales are not in dollars, they are in Euros, Yen, and Renminbi. To avoid the formerly high taxes of the U.S., multinational corporations kept huge amounts of capital oversees. The lowering of the corporate tax rate makes it significantly more inviting for reinvestment here in the States.
Smaller corporations with U.S. based sales will also benefit from this lower tax rate. More capital in the hands of entrepreneurs typically results in more hiring, more investment, feeling confident and willing to take more risk and expand.
Increased Standard Deductions:
Standard deductions are increasing from $6.5k single and $13k married to $12k single and $24k married. This will make it more advantageous for many of us to go with the standard deductions rather than itemize, in fact it is estimated 90% of Americans will elect to take standard deductions in 2018.
This means that many home buyers will not use their mortgage interest deduction because the standard deductions are greater than their itemized deductions (mortgage interest being one of them).
This does not mean families are losing a deduction, it means they have greater benefit to use the standard deduction and as such, they will likely elect to go that route. More deductions equals more cash available to invest, pay down debt, or cover housing payments.
No change to the exclusion of gain on sale of a principal residence.
Reduction on the limit of the Mortgage Interest Deduction (MID):
The original proposal reduced the limit on the mortgage interest deduction (MID) amount from $1M to $500k. Thankfully the House and Senate ended up in the middle at $750k for any new mortgage. New borrowers taking out a mortgage between $750k and $1M will lose their ability to write off mortgage interest over $750k. All existing mortgages are grandfathered in and MID can continue up to the previous limit of $1M.
It’s definitely going to be in the interest of some jumbo mortgage borrowers to keep their old loan rather than refinancing, as refinancing would lose them their MID over $750k.
Although this will have a muted effect as it will only impact the high end borrowers, this is a loss.
State and Local Tax (SALT) Deductions:
The original proposal called for the elimination of the state and local tax deductions (including property taxes). Thankfully the final bill allowed for deductions up to $10k for the total state and local property taxes.
This will impact homeowners in the high end of the market, but the vast majority of Americans pay less than $10k per year in property taxes so the impact will be muted.
So we have some wins and we have some losses for the housing market with the tax reform. In aggregate however, I cannot see any way the wins do not far exceed the losses.
Plain and simple – individuals and corporations will keep more of their hard earned money with this tax reform. I predict the tax reform will be good for business and consumer confidence in 2018, and will result in real estate values appreciating more than most economists expect.
The most probable outcome of having more capital on hand is more demand for housing (certainly not less). Demand in housing is already outpacing supply of new homes being built and the likely increase in demand will only accelerate home price appreciation.
Josh Mettle NMLS #219996 is an industry leading author and mortgage lender, specializing in financing physicians, dentists, CRNA, and physician assistants. You can get more great physician real estate and mortgage advice here or his by visiting his book site. Josh is also a fourth generation real estate investor, and owns a number of rental homes, apartment units and mortgages. Josh is dedicated to helping physicians become more financially aware and able; listen to “Physician Financial Success” podcast episodes or download Josh’s latest tips and advice here.
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