On December 13, 2017, House and Senate leaders reconciled their two versions of the Tax Cuts and Jobs Act. Both versions are based on the Trump administration’s plan from September 27, 2017. The Committee on Taxation could receive the final draft of the bill for analysis by December 15, and each house of Congress could vote on it as early as next week. President Trump wants to sign it before Christmas.
So what is included?
- The combined bill cuts the corporate tax rate from 35 percent to 21 percent in 2018. The top individual tax rate will drop to 37 percent.
- Most itemized deductions are eliminated. The exceptions are charitable contributions, mortgage interest, property taxes, and retirement savings.
- The combined bill limits the mortgage interest deduction to the first $750,000 of the loan, down from the $1 million limit currently in place.
- The combined bill allows taxpayers to deduct up to $10,000 in state and local taxes. They can choose between property, income, or sales taxes.
- Deductions for interest payments on moving expenses are eliminated.
- The standard deduction for everyone is doubled. A single person’s deduction increases from $6,350 to $12,000 while the deduction for Married and Joint Filers increases from $12,700 to $24,000.
These are only a few of the many changes included in the bill. But what effect might these changes have on the real estate market?
Because it’s designed to put limits on popular deductions that benefit homeowners and limit the number of itemizers, the proposed tax bill is expected to put a dent in housing prices across much of the United States. The hardest hit areas are anticipated to be California, Connecticut, New York and New Jersey.
The plan to double the standard deduction that most Americans now claim on their tax returns each year could reduce the number of families who bother to itemize. This could cause the tax benefits of owning a home, such as the mortgage interest deduction, to be reduced and hold down real estate prices as fewer people seek to purchase homes. The mortgage interest deduction for new buyers as detailed in the bill will be limited to just $750,000 of the loan. The bill also caps the property tax deduction at $10,000. While this deduction may seem high across much of the United States, in New Jersey, many homeowners pay property taxes significantly higher than $10,000.
This bill may also cause a migration of homeowners out of higher tax areas, such as New Jersey, into lower tax areas. As state and local tax rates rise, it is financially smart for high income taxpayers to escape these taxes by moving to lower tax locations. As the taxpayers move out of an area, the property values in that area decline. The proposed tax bill that limits state and local deductions against a taxpayer’s federal income taxes may significantly contribute to this dynamic.
There is, however, some skepticism out there that the new bill will have a major impact on the housing market. Some skeptics say that many homeowners do not itemize their deductions and therefore do not currently benefit from the tax breaks that will be eliminated. Also, because of the reduction in individual tax rates, prospective home buyers might have more money to spend on a home. People buy and sell homes for reasons like the birth of a child, job transfer, marriage/divorce, etc. that may “trump” (no pun intended) the tax benefits of owning a home. And finally, there is rising demand among millennials for housing and a limited supply of single family homes.
We will keep you updated as more information on the Tax Cuts and Jobs Act becomes available and things become clearer.