Reduced tax rates, increased standard deductions and decreased property tax deductions are some of the key areas of the 2017 Tax Cuts and Jobs Act that affect the housing industry, home ownership and real estate agents.
Dr. Frank Nothaft, CoreLogic’s chief economist, shared his general thoughts about how the new tax legislation impacts the housing industry at the company’s EPIQ conference in the fall of this year. (EPIQ stands for Effective Practices, Informatics and Quality.)
Beginning with the positive, Nothaft noted that the tax cuts defined in the bill were designed to create more disposable income that “should have a positive effect on the housing market.” More disposable income = more demand for housing. In economic jargon, this is called the Income Effect.
On the other hand, or the Price Effect side of the equation, the legislation reduced some benefits of owner occupancy by capping the combined state, local and property taxes at $10,000. Fewer homeowners get the “old” benefits of deducting property taxes and interest payments. The legislation raises the relative cost of owning vs. renting and most certainly lessens the after-tax benefits of homeownership.
At the time of his remarks in Fall 2018, Nothaft did not see any “real effects” of the tax legislation on the housing industry…no large drop in home prices, no drop in sales volume and no real impact on inventories but…ALL of these patterns have changed.
Inventories are beginning to spike, prices and sales are dropping and people are moving to “tax friendly” states from “high tax” states.
From where we’re sitting, Dr. Nothaft was wrong. The market is definitely resettling and the 2017 Tax Cuts and Jobs Act is one of the primary reasons for this shift in the housing market nationally.
In terms of how the new tax legislation affects real estate agents, the same things that were deductible before this legislation continue to be deductible.
- Auto expenses
- Office expenses
- Business travel
- Properties, both residential and business
- Professional services
(Check with your tax attorney and/or accountant for specifics here!!!)
The one thing that has changed with the new tax legislation is pass through deductions. To qualify, your real estate business must be set up as a pass through entity (e.g. sole proprietorship, partnership, S corporation, LLC or LLP) These deductions are more generous to your bottom line so again…check with your tax attorney and/or accountant for the specifics here!!!