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The New Tax Plan and Real Estate: What You Need To Know

Last Thursday, markets responded to the House passing the GOP’s $1.5 trillion tax plan with a 227 to 205 final tally. The real estate industry felt unnerved as the net value of homebuilders stocks dropped 3%. But what provisions are markets responding to in this plan?

What’s the Plan

The Washington Post describes it as a program of “tax relief to companies.” Paul Ryan calls it a “tax cut for everyone.” The Republican talking point that this bill benefits the middle class been castigated by Democrats who regard it as benefiting the über-wealthy.

Since its release, voices in the housing industry have voiced opposition to the plan. Most notable among these voices is Jerry Howard, chief executive of the National Association of Home Builders, who described the bill as “a direct assault on the American dream of homeownership.” William Brown, the current president of the National Association of Realtors expressed a similar sentiment, asserting that the bill “puts home values and middle class homeowners at risk.”

 Brown and Howard are responding, as many other real estate professionals have, to three provisions in the bill:

  • Lowering the mortgage deduction cap
  • Introducing a cap on property tax deductions
  • A limit imposed on the capital gains exemption for homeowners that are selling their home

These provisions produce winners and losers in different parts of the market—both in terms of wealth and geographical location. How can real estate professionals position themselves relative to tax reform if it does manage to pass the Senate? 

What does a lowered mortgage deduction cap mean for real estate?

The lowering of the mortgage deduction cap has been the most polarizing aspect of this bill. As the law currently exists, homeowners can deduct interest paid on their mortgages up to $1.1 million. This figure stays the same for existing homeowners, but all homes purchased in the future will only be able to deduct interest paid up to a figure of $500,000. This makes it less likely for people to move since their new home will have a less favorable mortgage by default. Further consequences here are asymmetric across the country; homeowners in lower-priced markets are likely to be unaffected by the mortgage deduction, since they still won’t hit the cap. Middle-class Americans living in high-priced markets such as New York, New Jersey, and California will see the after-tax cost of their home ownership increase substantially.

How does the waiving of income tax deductibles and the new cap on property tax deduction impact housing?

Another disputed aspect of the plan is the cap on property tax deductibles. The current model allows homeowners to deduct property taxes from their federal tax bill. However, under this plan, a $10,000 cap is imposed on property tax deductibles. Joseph Rand, managing partner of Hudson United Mortgage writes that this targets any area with high property taxes, ultimately concluding that “this change makes it more expensive to own your own home.”

Changes in the capital gains exemption

As the law stands currently, individuals who sell their home are able to exclude from their taxable income amounts up to $250,000 in capital gains. The capital gains exemption exists as an incentive for mobility—it makes moving a good decision financially, and is therefore good for real estate. The current rule says you must have owned and lived in your home for two of the past five years in order to qualify for the exemption. The bill passed by the House increases the qualifying duration to five of the last eight years. In other words, the new law incentivizes individuals to stay in their homes longer.

What does this mean going forward?

Organizations such as the NAHB and the NAR wouldn’t come out against the tax plan unless there was something seriously objectionable; these three provisions are examples of how the plan might negatively impact the real estate industry. Clare Trapasso, Senior News Editor for writes that although this plan has winners and losers, the list of losers is longer than the list of winners. Other minor provisions stand to hurt real estate such as one making second homes and vacation homes more expensive. One group who does benefit from this bill is investors. Joseph Rand, a managing partner of Hudson United Mortgage, writes in inman that the bill preserves advantages for owning investment properties since some caps imposed don’t apply to investors and the bill preserves certain other tax advantages for investment properties. Rand concludes that this doesn’t redeem the fact that the bill hurts sellers, buyers, homeowners, and agents. If tax reform does pass the Senate and then a compromise is reached between the Senate and the House bills, realtors should prepare for a slump to say the least

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