Trump's Tax Plan: So Few Details, So Much to WatchBy Andrew King
Real estate professionals have been busy parsing the statement of principles issued in the spring by U.S. Treasury Secretary Steve Mnuchin announcing "a massive tax cut for businesses and massive tax reform and simplification."
Real estate professionals from all corners of the industry have spent a good part of their busy season trying to predict what will actually happen with the federal tax code and how it will affect their clients. Yet, there isn't a real consensus in the community despite Mnuchin's promise that the mortgage interest deduction will remain intact. Under the statement, mortgage interest and charitable giving are the only two deductions being kept in the plan. But while all agree that the mortgage interest deduction is a critical federal policy that incentivizes home-buying activity for millions of Americans each year, there are concerns that other major changes to the tax code—such as the doubling of the standard deduction—could render it useless. According to the National Association of REALTORS®, the plan would "impact the demand for owner-occupied housing by reducing the number of homeowners who claim the mortgage interest deduction, eliminating the itemized deduction for property taxes, and decreasing marginal tax rates." As a result, home values could drop 8 to 12 percent in the short-term depending on the regional market, concluded the NAR report, which was backed by a financial review conducted by auditing giant PricewaterhouseCoopers. Many real estate professionals think the comprehensive tax overhaul will not benefit the housing market or the local communities that depend on those tax revenues. This is mainly because most won't claim the itemized mortgage interest deduction, instead opting for the newly doubled standard deduction, which blocks taxpayers from claiming specific items such as mortgage interest. Such a move would also disrupt the plans of former homebuyers who made their real estate investments based on the financing equations dictated by the mortgage interest deduction. With the mortgage interest deduction all but neutralized for so many homeowners and potential buyers, real estate professionals are looking to other parts of the comprehensive tax reform to find new wealth-building strategies for their clients. One aspect getting a lot of attention is the plan's removal of the alternative minimum tax (AMT)—a mechanism that was initially implemented to make sure high net-worth taxpayers couldn't avoid paying their fair share, but has become more of a burden on the upper-middle class instead. The elimination of the AMT could boost the market for second homes, some real estate professionals say, even if price increases are slowed by the dilution of the mortgage interest deduction at the entry level. High-income earners could see a major benefit with the removal of the AMT, which will encourage them to borrow the maximum allowable against their home. With current deductibility being limited to the first $1 million of home purchase debt—including the primary residence and up to one additional home, as long as the second home is not an income property—the interest rate will effectively be subsidized by the tax deduction, which can free up funds for more second homes or vacation properties, as well as larger loans on personal residences. For the lower end of the market, however, there could be more of a shift toward renting, and construction will likely shift from building entry-level single-family homes toward move-up luxury homes, second-home condominiums, and multi-family rental units. At the high end of the market—or regions such as Southern California, where middle-market homes can hit $1 million without even including air conditioning—the upside of that analysis has a relatively low ceiling, which has luxury agents keeping a close eye on the proposed elimination of state and local real estate tax deductions. Andrew King is an award-winning journalist with 15 years of experience with the Gannett newspaper company, appearing in The Journal News (Westchester, NY), Asbury Park Press and USA Today. He also contributes to The Real Deal, TheLadders.com and TechPageOne.com. |
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