The New Tax Reform Bill – How Does it Impact Real Estate?

One of the biggest pieces of new legislation from Washington is The Tax Reform and Jobs Act.  The new legislation, effective for the 2018 tax year, comes with pros and cons specific to the real estate market. The bill is wide-reaching and will impact homeowners, homebuyers, real estate investors, and agents and brokers.

At the individual level, many will see lower income tax brackets.  The bill set a schedule of marginal lower tax rates for individual filers and joint filers.

Individual Filers

Current Law New Law
10% $0-$9,525 10% $0-$9,525
15% $9,525-$38,700 12% $9,525-$38,700
25% $38,700-$93,700 22% $38,700-$82,500
28% $93,700-$195,450 24% $82,500-$157,500
33% $195,450-$424,950 32% $157,500-$200,000
35% $424,950-$426,700 35% $200,000-$500,000
39.6% $426,700+ 37% $500,000+

 

Married Filing Jointly

Current Law New Law
10% $0-$19,050 10% $0-$19,050
15% $19,050-$77,400 12% $19,050-$77,400
25% $77,400-$156,150 22% $77,400-$165,000
28% $156,150-$237,950 24% $165,000-$315,000
33% $237,950-$424,950 32% $315,000-$400,000
35% $424,950-$480,050 35% $400,000-$600,000
39.6% $480,050+ 37% $600,000+

 

The bill also retained the current maximum capital gain tax rates (15%, but 20% for those in the highest tax bracket). One key part of the law for homeowners is the exclusion for capital gains on the sale of a home. This is a positive for homeowners. Homeowners, however, lose some of the value of mortgage interest rate deductions and property tax deductions due to the new law.

The ability to deduct mortgage interest reduces the deductible mortgage debt to $750,000 for new loans and eliminates the deduction on home equity debt unless the proceeds are used for substantial improvements. The property tax deduction is now limited to $10,000 for total state and local property tax. On top of those changes, the increase to the standard deduction (to $12,000 for single filers and $24,000 for joint filers) will reduce the need to itemize deductions.  The National Association of Realtors (NAR) estimates there will be no tax differential between renting and owning for 90% of taxpayers.

Businesses will also benefit from The Tax Reform and Jobs Act.  The corporate tax rate has been lowered from 35% to 21%.  An analysis by the Congressional Budget Office (using 2012 data) revealed that the median average corporate tax rate paid in 17 large economies was 20.4%.  The new corporate tax rate brings the U.S more in-line with other large, global economies.  Many real estate agents and brokers operate as sole proprietors, independent contractors, or pass-through businesses and many will file under the new corporate tax rate. The bill also includes a 20% deduction if certain conditions are met. Other expenses such as entertainment, amusement, and recreation, as well as membership dues are not deductible under the new law.

The impact of The Tax Reform and Jobs Act will be substantial for some and minimal for others.  Although personal income tax brackets are generally lower, the tax benefits of homeownership will be diminished due to interest and tax deduction limits. This may make owning a home less advantageous from a tax perspective and could influence the real estate market.  Like the NAR estimates, 90% of taxpayers will see no tax differential from owning versus renting. Tax incentives is definitely not the only factor a home buyer considers, but those considering a home purchase may be more selective and less likely to bid-up home prices. Many households stretch themselves thin in the finance department. The tax reform will cut taxes in most households making it easier financially on households to pay down mortgage debt, invest in their current home or save to purchase a new home. Whether you are a home buyer or home seller, the ever-changing market conditions make selecting a real estate agent that is current with market trends and has extensive knowledge of the real estate market very critical.

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