The latest tax bill is the talk of DC and is a source of disagreement about its effect on different parts of our economy. As a self-proclaimed economics nerd, I wanted to give a little bit of insight into what this bill could do to the real estate market. There are a few big provisions that are being considered that are worth noting:
The Rise in the Standard Deduction: For years the National Association of Realtors has beat back attempts to get rid of the mortgage interest deduction. This is a benefit to homeowners living the American dream of owning property and is currently one of the largest deductions that homeowners use each year on their taxes. The bill uses a bit of a back door approach to decreasing the number of citizens who choose to itemize. Instead of eliminating this deduction (there is a possibility of it being curtailed), the tax bill increases the standard deduction for individuals. What this does is make it less likely the itemized deduction will reach the standard amount, thus decreasing the advantage of owning a home versus not owning a home.
The Five Out of Eight Rule: As the law currently stands, you must live in your home for two out of the last five years to avoid paying capital gains taxes on your profits. This is currently capped at $250,000 for individuals and $500,000 for couples. The tax bill proposes changing this rule from two out of five years to five out of the last eight years. This puts current first time homeowners in a sticky situation. Low inventory coupled with great interest rates has made way for large amounts of appreciation across the housing market over the past few years. What this bill does is discourage homeowners that have lived in their home for between two and five years to move and instead encourages them to wait it out to avoid taxes.
Property Tax Deduction: The house and the senate disagree on how this should play out, but there is some discussion of doing away with the property tax deduction altogether. If nothing else, it will likely be capped at a certain number, leaving high property tax states a bit high and dry. This is just another way the bill makes homeownership less advantageous than the current rules we play by.
How will this change our market? It will be very interesting to see the effect of this bill (assuming something gets passed) and to see how it will change our marketplace specifically. Economics are extremely complex and changing this many facets at one time makes things hard to predict.
*This should not be misconstrued as legal or tax advice as I am neither a lawyer nor an accountant. All of the above points are hypothetical as the final bill has not been passed yet.