Implications of the ‘Tax Cuts and Jobs Act’ that was signed into effect December 2017 on the real estate market are as follows:
On Real Estate Agents:
The Tax Cuts and Jobs Act has brought mostly positive changes to the real estate sector. Under the new law, there is a deduction for qualified business income of up to 20%. This is a positive impact for realtors below the income caps of $157,500 filing single and $315,000 filing jointly. Small business owners welcome this write-off and it does positively affect real estate agents.
There are a few changes that impact existing homeowners, some more significant than others.
The first is the new standard deduction of $12,000 for those filing single and $24,000 for those filing jointly. 10% of homeowners will have itemized deductions exceeding the standard deduction amount, meaning they won’t be writing off the interest they paid on their mortgage. Additionally, under the new law, state and local property taxes may only be deducted up to $10,000. This means that any homeowners who paid more than that in taxes are not able to write anything in excess of $10,000.
The other big change homeowners will face is no longer being able to write off the interest paid on second mortgages and home equity debt. Deductions are only permitted if the proceeds of the loan are used to significantly improve the residence. This affects the mortgage industry as homeowners have less incentive to borrow against the equity on their home.
On Prospective Homebuyers:
The standard deduction was increased to $12,000 for single filers and $24,000 for those married filing joint. The National Association of Realtors writes, “By doubling the standard deduction, Congress has greatly reduced the value of the mortgage interest and property tax deductions as tax incentives for homeownership. Congressional estimates indicate that only 5-8% of filers will now be eligible to claim these deductions by itemizing, meaning there will be no tax differential between renting and owning for more than 90% of taxpayers.” Overall, this change means fewer new homebuyers in the market.
This impacts Millennials the most as they are a generation of reluctant homebuyers and serial renters. They make their first real estate purchase much later than the generations before them and their obligations with student loan debt exceed anything we have seen before. This new tax law going into effect further decreases their incentive to purchase real estate.
Tax Cuts and Jobs Act & the Real Estate Market:
Unfortunately, the Tax Cuts and Jobs Act of 2017 does have some negative implications for the real estate market. Since 90% of homeowners cannot itemize under the new law, there is little incentive to own real estate instead of renting. Coupled with the increase in interest rates, the market has slowed down in markets all across the country. That being said, inventory shortages are keeping prices up in the near term.
Overall, the Tax Cuts and Jobs Act has some benefits and downfalls for the real estate market. Take some time to analyze whether the new tax law will positively or negatively affect your business.