3 Tax Code Change Affecting Homeowners – and Our Industry

Republicans in the House and Senate have unveiled their plans to reform the tax code and they're looking to chop some tax benefits of buying and selling a home.  Here's a look at some of the potential tax changes in play that could impact homeowners:

1. Reduce the mortgage interest deduction from $1,000,000 to $500,000.  Eliminate the interest deduction from 2^nd homes and 2^nd mortgages.  This will have the biggest impact in areas near the coast on both sides of the US. 

The new Bill would require homeowners to itemize their deductions. The Tax Policy Center estimated that the percent of filers who claim the deduction would fall to 4% from 21% if the standard deduction doubles.

This will have the biggest impact on resales and construction in areas near the coast on both sides of the US.  It will definitely affect the Sacramento, El Dorado, and Placer Counties where a high percentage of homes are in the $550K+ range. 

1. Eliminating state and local tax deduction is in the Senate’s plan.  The House’s plan would not eliminate this deduction, but it would cap it at $10,000.  According to data from ATTOM, a little more than 4 million Americans have a property tax bill above that threshold.

Both proposals could serious hit homeowners in high tax states like New Jersey, Connecticut, New York, and (yup, you guessed it) California.

1. Limit tax breaks for sellers.  Some of the suggested changes would also mean homeowners could get hit with a bigger tax bill on the sale of their primary home.  Current law allows sellers to generally exclude $250,000, or $500,000 for those filing jointly, from capital gains when selling a home as long as they've lived in it for two out of the past five years.  
   Both the House and Senate want to increase the live-in time period to five out of the last eight years. The Senate bill allows for some exceptions to the time requirement, like if a seller is leaving due to a change in jobs or health care.   
   This would have a clear impact on mobility by creating a direct and likely unexpected tax bill for owners of homes, as well as reducing gains these home owners expected to be part of their retirement portfolio.  It also will result in selling less homes…

What is our take on the Bill?  We know that the budget isn’t balanced.  We’re not convinced that this is the way to do it though.  Why? The new tax Bill strikes at the very core of our industry – the monetary benefit to owning a home.  The proposed tax laws would also affect many other industries.  When a home is purchased, a significant amount of revenue is generated from the tax on the home purchase, the landscaping and new light fixtures at Home Depot, and the contractor that installs the new counter tops in the kitchen – all that is lost when a potential homeowner decides to wait on purchasing because it isn’t affordable.

Along with the proposed changes, a thorough study must be done on the unintended consequences of eliminating laws that encourage home ownership.  We’ll read it and write another article on the results.  Stay tuned – this affects all of us.