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What the Tax Cuts and Jobs Act Could Mean for the Housing Market

Nov 3, 2017 Mortgage Speak
Yesterday the House Republican Party’s “Tax Cuts and Jobs Act” was publicly released and many are wondering what the proposal will actually mean for American homeownership. Here is a summary of what we understand the act to have proposed and what changes could be implemented:

  • Mortgage Interest Deductions: The most dramatic change in the proposal is reducing the allowable mortgage interest deduction cap to $500,000. Currently, homeowners can itemize their mortgage interest as a tax deduction for interest paid on up to $1 million in principal mortgage balance. As proposed, this would primarily affect areas of homes that typically have more than $500,000 borrowed for the mortgages and especially states, such as California, where average home prices are among some of the highest in the nation. Per the reports, the plan will apply to newly purchased homes and will grandfather in current homeowners for the current $1 million maximum.
  • Property Tax Deductions: Another significant element to the proposal is limiting property tax deductions to $10,000. As home prices have increased, we have also seen a rise in property taxes, and this cap would likely affect the same aforementioned group of people that are purchasing higher priced homes and other homeowners that live in areas with rising property tax rates.
  • Capital Gains Exemptions: In addition, sources say the plan proposes to alter the capital gains tax rules. Under the proposal, the exemption can only be claimed on primary residences that have been occupied for at least 5 years and can only be exercised every 5 years – a three-year increase from the current 2-year requirement.
  • Increased Standard Deductions: To mitigate some of these cut backs, it’s reported the proposal also includes an increased standard deduction of $12,700 for individuals and $24,000 for families as well as improved child credits.

The Concerns: Within the Real Estate community, these changes have sparked concern over what the future of American homeownership will look like under this new act. Because the mortgage interest deduction change is reported to apply to mortgages obtained after 11/2, much of the focus is on how this will affect future buyers and sellers. Some believe that reducing the allowable interest deduction will discourage home buying, especially from move-up buyers, and will force home prices down. Coupled with that concern, the grandfather rule and capital gains changes may incentivize current homeowners to remain in their current homes longer, affecting the supply and demand within the housing market. In addition, we could see an increase in the down payments buyers choose to put on higher priced homes in order to get their loan amount down to the $500,000 tax deductible limit, potentially taking buyers longer to save up for a home purchase.

Another Perspective: With any proposed change, it is natural to feel a sense of uneasiness. We do not know what the future of this act will hold (or if we will see it come into fruition as it stands), but there are also many that don’t see these changes as having a significant impact on the housing market today. While tax deductions are certainly a perk of homeownership, it’s also important to remember that it’s not typically the driving force in the decision to rent versus own, especially at the $500,000+ level. Many would say that homeownership is a value rooted in the American Dream and that people naturally want to have a home they can call their own. In addition, only approximately 5% of mortgages throughout the U.S. are more than $500,000, and with continuously rising home prices, the mortgage interest deduction limit may curtail some of that rapid price increase making it easier for more Americans, especially first-time homebuyers, to enter the housing market and be able to afford a home. With the stock market doing well, it’s also likely that buyers will choose to keep more funds in investments and continue to borrow the money to purchase a home.

The most important thing is to remain aware of the changes that are put in place and how they will impact you personally and professionally. At this time, no one can predict the future of this proposal, but staying in the know will help you strategize as we see what laws are actually put into place.

Article written by,

Kim Nelson, CEO, BankSouth Mortgage Sources:

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