How does the pending income tax legislation affect homeowners? It is a bit premature perhaps to discuss as the Senate must still agree, but hey, why not. I am viewing this as a real estate pro, not a tax pro, please consult a tax accountant to verify any information discussed below.
The current House version keeps the real estate property tax deduction but caps it at $10,000, which will not affect most people here in STL. It also keeps the mortgage interest deduction but lowers the cap from $1,000,000 to $500,000, which again will not affect most homeowners in STL. Bear in mind, these deductions only count if you have enough to itemize on Schedule A of your tax return to include mortgage interest and property tax on your principal residence, charitable donations, high medical expenses, and various other expenses, over and above the standard amount granted. With the standard deduction almost doubling to $24,000 for married couples, it takes a lot more expenses to top that standard. This, in effect, will make the valuable homeowner deductions meaningless for many more folks in years to come, assuming this configuration goes thru. Your tax bill may be lower on the bottom line, or it may not, but are there enough incentives to purchase and own a home? Are they even necessary?
I know our industry – Realtors, lenders, home builders, and others connected to residential homes – is fighting cuts to homeownership benefits. Our National Association of Realtors is reporting a possible 10% drop in home values. While I find that a bit dramatic, it certainly could stall the current expansion of purchasing activity, and even cause a slight drop in values in the short term on fear of the unknown. Long term, however, I feel that the overall desire to own your own home will remain high and prevail over renting. Even if rental activity did pick up, as it has the last few years, someone has to own the home to rent it out, keeping a certain level of demand for housing purchases. It is even feasible that since no one is talking about changing tax cuts for investment property, that more investors buy up single family homes to rent them out, and drive demand higher.
Another facet of income taxes that face homeowners is the capital gains tax. Currently, you owe no tax on the gain you make between buying a house and selling it at a higher price, up to a difference, or a “gain” of $250,000 as a single person and $500,000 as a married couple, and taking certain expenses into account, if you lived in it at least 2 of the previous 5 years. This is a very important exclusion now in the tax code, and will affect many people at all price ranges if not retained. There was talk of adjusting this to having lived in the home 5 of the last 8 years, disqualifying anyone who moves out in less than 5 years and subjecting them to a surprise tax, although I am not aware of the current status on this issue.
Another possible outcome is this: High end homeowners stand to lose more of their deductions on the mortgage interest and property tax caps. If they scale down in price, it puts more buying pressure on homes under $600,000 or so, and conceivably more folks will move from high cost metros to lower price ones, like St Louis. Being one of the most affordable regions in the Top 25 around the country, our area could actually come out a winner in this tax overhaul!
Happy taxing!
Gary Hoeferkamp, Broker - Owner of Hoeferkamp Real Estate 