The Republican Tax Bill was introduced last week to the fanfare of cutting taxes and increasing jobs. Nothing is set in stone as of yet because the bill continues to generate much discussion, lobbying efforts and revisions up until its final vote.
We’ll update any changes in the content of the bill as the legislative process goes forward but, in the meantime, here are some key areas in the proposed tax bill that relate specifically to real estate.
Mortgage Interest Deductions: The House bill proposes that mortgage interest deductions for existing homeowners can claim up to $1.1M to acquire or improve a first home and second home. However, the proposed bill slashes mortgage interest deductions to $500,000. for homes purchased in the future. Additionally, the proposed bill could limit mortgage interest deductions to one principal home only, thus ending any deduction for second or vacation homes. This means that a buyer paying 4% interest on a $1M vacation home would be able to deduct just $20,000 instead of the current $40,000.
Capital Gains Exclusion: This provision enables homeowners to exclude up to $250,000 for single and $500,000 for married taxpayers from their taxable income for their primary residence. The caveat to qualify for that tax break has, however, changed. Homeowners must have lived in that house for 5 out of the last 8 years instead of the current requirement of living 2 out of the last 5 years in that residence. In order to use that exemption, the taxpayer would be limited to only 1 (one) sale every 5 years rather than the current limit of 1 (one) sale every 2 years. Additionally, under the currently proposed tax bill, a taxpayer could lose the gains exemption if the taxpayer’s adjusted gross income (in look-back years) exceeded $250,000 if single and $500,000 if married.
State and Local Tax Exemptions: Deductions of property taxes on a home would be capped at $10,000. Currently, all state and local taxes are deductable. The proposed tax bill provides for no deduction for state income taxes. This provision of capping property tax deductions at $10,000 in the proposed tax bill hits expensive markets hard.
Alternative Minimum Tax: The proposed tax bill completely eliminates the AIM. This may or may not benefit high-income homeowners who lose their mortgage interest deductions.
How do real estates most powerful associations feel about the proposed tax bill now under consideration?
The National Association of REALTORS is fighting hard against it. It anticipates that these proposed changes could be detrimental to both primary and second/vacation housing prices. NAR is currently deciding whether or not to increase its membership dues in order to increase its lobbying efforts against this bill.
The National Association of Home Builders (NAHB) uses stronger language in opposing the proposed tax bill. Jerry Howard, CEO of NAHB, said that the tax bill “…is a bad bill for the housing sector…all the resources we were going to put into supporting these efforts are now going to go into opposing them.”
Granger MacDonald, chairman of the NAHB, said, “The tax bill eviscerates the mortgage interest deduction and strips the tax code of its most vital housing tax benefit. This tax blueprint will harm home values, act as a tax on existing homes and force many younger, aspiring homebuyers out of the market”
You may want to contact your Congressional representatives to share your thoughts and concerns as they relate to the proposed tax bill.