The New Tax Bill and Deductions for Homeowners

The New Tax Bill and Deductions for Homeowners

For years, the real-estate industry has strongly benefitted from generous tax deductions. These deductions raised home values by making it cost-affordable for people to own properties. It also allowed them to shoulder their local taxes across the board. However, with the Republican’s new tax bill underway in Congress – the real estate industry is deeply worried that that the fallout will harm business by making home ownership less valuable. Similarly, what will happen to those home owner deductions that the industry relief upon for so many decades?

The new tax bill has sent real-estate organizations in frenzy across the nation. So much so that they are calling legislators, while warning clients about future tax bills and hikes. Similarly, their supporters and proponents are staging mass protests – in an all out effort to keep homeowners as a favored class in the tax codes. According to Linda Jay, Chief Executive at Bakersfield Association of Realtors in California, “We are the Realtor Party – not Republicans or Democrats.”

Ms. Jay – and several within the real-estate realm – have been at the forefront of this new legislation. In fact, she and other agents gathered in front of the local office of Rep. Keven McCarthy. With signs and chants of “save home ownership” – many believe this will be a long-fought battle to restore true value to all new and existing homeowners across America. While the protestors understand the pressure McCarthy is under, they too have an agenda that must be met to protect each and every homeowner across the land.

What the Economists are saying

Many economists believe the new tax bill is sending fear into the hearts of homeowners and agents alike. In fact, the Senate version of the bill eliminates homeowner deductions for local property taxes. While the House bill caps this at $10,000 – both the Senate and House bills will effectively make mortgage-interest deductions less valuable to homeowners. Similarly, these provisions could even raise the costs of owning a home – making ownership less attractive for potential buyers and investors. It will even depress property values as a whole and seriously affect the real-estate industry at large.

The new tax bill also increases the time it took homeowners to qualify for exclusions from capital gains taxes that are owed. This, of course, pertains to when they eventually sold – or will sell - their homes. This will reduce transaction volumes, which are the basis of agent commissions. With more people being encouraged to wait longer to sell, agents may see a dramatic decrease in both property listings for sale and purchase across the industry.

Every aspect of this new tax plan will hit the people in high-cost, high-tax areas hardest. In fact, Moody’s Analytics recently conducted an intricate analysis and assessment of the new tax bill. They found that the country’s most expensive real-estate markets may see significant declines in overall home values. This, of course, relates to both versions of the tax plan in Congress.

Winners and Losers

According to Mark Zandi, Chief Economist at Moody’s Analytics, this plan will have big winners and losers. In fact, those that reside in New York or New Jersey will get crushed for sure However, those in West Texas or Nebraska will be okay – and may even see a few benefits here and there.

New York and New Jersey are blanketed by expensive homes and some of the highest property taxes in the nation. With the new tax bill, home values could fall as much as 14 percent by 2019. This is under the Senate plan, and based on careful calculations and assessments by Moody’s Analytics. In addition, the suburbs around Chicago, Philadelphia, and Cleveland also top the list of areas that will surely be affected.

While these figures are still estimates, they can be viewed with some degree of skepticism. However, they do reflect the fundamental truth about tax codes. That, of course, is that tax codes subsidize home ownership – thus raising the value of homes. With all else being equal, removing these tax deductions and breaks reduces home prices and overall value.

Different Views

Some economists believe the tax bill will not have a major impact on the real-estate industry. In fact, many believe that the bills could help families downsize or purchase smaller homes. This would help them save time and money, while not having to worry about major tax hikes because of the regions they live in. Many economists also feel that most household have already chosen not to itemize their deductions. This means they will not benefit from housing-orientated tax breaks that the bills would eliminate.

By downsizing or moving into smaller properties, the real-estate industry will still forge ahead with new listings, sales and investments. Similarly, home-buyers will have more money to spend – and the market will be stimulated or at least remain steady and current.

According to Vishwanath Tirupattur, US housing strategist for Morgan Smiley – he believes the bills will definitely have a modest negative impact on the housing market. This includes overall home prices and sales activity, which can be counter-balanced by millennials seeking single-family homes. He believes the rising demand for housing will always be there – no matter the new tax bill or the predominant nature of the market which is turbulent at best.

The Congressional Stance

Despite the political upheaval that has blanketed Washington, the Senate and House are moving ahead with their versions of the new tax bill. However, the bill will not repeal the tax code’s biggest present to homeowners – the deductibility of interest for most mortgages. It would only make those deductions less valuable across the board.

Both bills will also double the standard deduction, which would result in fewer household itemizing their deductions. Household that will take standard deductions – will not direct benefit from the mortgage-interest deduction. This, of course, reduces the value of owning a home. The House version of the bill also caps the amount of mortgage debt eligible for the deduction at $500,000. The Senate version would leave the cap at the current level of $1 million.

For more information on the new tax bill and how it will affect your deductions, simply check the Web or speak to your financial planner or tax advisor today.