The U.S. House and Senate have passed sweeping tax reform legislation that is expected to have a major impact on housing markets. The bill will go to President Donald Trump now that the House has passed the bill a second time to accommodate small, last-minute changes made in the Senate….
The bill is an improvement for homeowners when compared to earlier House and Senate versions, because it makes several changes NAR sought. However the structure of the bill continues to raise concerns, and NAR President Elizabeth Mendenhall has said the association will look for legislative opportunities next year, as they arise, to improve the law.
The limitations on these and other deductions means many homeowners who itemize today will find it more attractive to take the newly increased standard deduction, although that deduction is less valuable than it initially appears because the bill also eliminates the personal and dependency exemptions.
In general, the bill lowers tax rates and almost doubles the standard deduction while making itemized deductions less attractive to use. The bill keeps the mortgage interest deduction in place, for both first and second homes, with a mortgage limit of $750,000 for each, down from $1 million. The bill also keeps deductions in place for state and local income taxes and property taxes, but limits the two deductions together to $10,000, an amount that will mostly hurt homeowners in higher-tax states like New Jersey, New York, and California.
“The new tax regime will fundamentally alter the benefits of homeownership by nullifying incentives for individuals and families while keeping those incentives in place for large institutional investors. That should concern any middle-class family looking to claim their piece of the American dream,” Mendenhall said.
In a win for REALTORS®, the bill keeps current law in place on the capital gains exemption on the sale of a home. The earlier versions of the bill would have made that exemption harder to take and added limits on higher-income households. In the end, those provisions were removed.
In a change that could affect many real estate professionals, the bill creates a 20 percent deduction for owners of pass-through entities whose income is taxed on the individual, rather than the corporate, side of the code. The deduction phases out after a certain income threshold is reached.
The bill keeps current law in place for many provisions of importance to commercial real estate, including 1031 tax-deferred exchanges.
Although the bill is improved compared to earlier versions, Mendenhall says REALTORS® will stay engaged and will seek to make further improvements for homeowners. “We still have some hard work ahead of us,” Mendenhall said. “Significant legislative initiatives often require fixes to address unintended consequences, and this bill is no exception.”
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Bobbie Files is a Real Estate agent at SUCCESS Real Estate, covering the Bristol, Plymouth and Norfolk County areas