Earlier this year I had the opportunity to speak at an event called “Real Estate Industry Forecasts and Innovative Trends for 2018.” I was joined by two distinguished panelists, Ryan Conrad, CEO of the Northern Virginia Association of Realtors® (NVAR); and Roderick Maribojoc, Director of the Center for Real Estate Entrepreneurship, George Mason University.
We took on a number of hot topics that will be shaping the marketplace this year and beyond – ranging from growth projections across the region and new legislation that will ease zoning and allow for smaller housing footprints and … to new technologies such as 3D printing that will change how homes are built and driverless cars that will change how people commute. However, the number one question on the minds of everyone in the room was: “How will the new tax laws effect the real estate market?”
One year from now, individuals and families who own, buy, sell, rent, or invest in real estate, as well as real estate professionals, will be submitting returns under a brand new set of tax codes. The Tax Cut and Jobs Act, signed into law on December 22, 2017, has brought a sweeping change to the US tax system. While it’s still too early to tell what the longer-term impact the law will have on the economy, to some degree it will disrupt the real estate marketplace, while presenting both new challenges and new opportunities.
A Boon for the U.S. Economy?
With an estimated cost of $1.3 trillion, the main promise of the new tax system is that it will supercharge the economy. Proponents argue that marginally lowering income tax rates for most individuals, and reducing the corporate tax rate from 35% to 21% will:
- Put more money in everyone’s pockets;
- Repatriate hundreds of billions of dollars currently being held in overseas accounts;
- Make U.S. companies more competitive with their international counterparts, which will lead to increased hiring and more spending on research and development;
- Spur companies to use tax savings to reward employees in the form of higher wages and bonuses.
If the new tax system delivers as advertised, the U.S. economy is expected to grow at a robust clip of 3-4 percent a year, which will generate millions of new jobs and hundreds of billions of dollars.
For the real estate industry, this means more people will have more money to buy or invest in real estate, and home values will continue to appreciate. It goes without saying that we in the industry are rooting that this is the cause and effect scenario that plays out.
Key Changes to Real Estate Taxes Under the New Code
The new tax law brings with it changes to a number of provisions and deductions that had been enjoyed by home owners, home buyers, home sellers and investors. For some clients, the new code will result in tax savings and more money, while for others it will reduce eligible deductions and become more costly. According to Mark Zandi, chief economist at Moody’s Analytics, “National house prices could take an estimated hit of 4 percent over the next 18 to 24 months.” This is not to be construed as a decline in home prices, but rather a decline in the rate of appreciation in the housing market.
Among the top changes that impact homeowners are:
- Mortgage Interest Deduction – the limit on deductible mortgage debt has been reduced from $1 million to $750,000. ATTOM Data Solutions reports “The District, Maryland and Virginia are among the 15 jurisdictions with the highest percentage of mortgages above $750,000.” This change could impact buyers of homes in the $900,000 to $1.3 million range.
- State and Local Tax (SALT) Deductions — are capped at $10,000 per return. This will be felt in regions with higher state and local taxes.
- Estate Tax Exemption – has been temporarily doubled from $5.6 million to $11.2 million per person.
While the new tax code might seem imposing and confusing, the best advice agents can give to their clients is “not to panic”. Throughout history, whenever there has been a change in the tax code, the real estate marketplace has adjusted accordingly. This is just another fork in the road.
The fact remains that the demand for area real estate is showing no signs of slowing. The housing shortage and slower rate of home building means more competition for fewer properties. If a prospective buyer, seller or investor puts off a decision out of concern about the new tax code, he/she runs the risk of missing out on an opportunity. Most of these clients will likely face little to no differences, while others will run into challenges that weren’t there a year ago. Considering that since 2011, home prices have risen by 48 percent, while wages have grown just 15 percent in the same time period, now is not the time to sit on the sidelines.
Looking for Opportunities
As with any new law, and especially one with a $1 trillion price tag, there are always winners and losers. There will also be opportunities to be found. For example, there are new provisions that make it more attractive to invest in commercial real estate. The doubling of the estate tax exemption as well as the lowering of taxes at the higher brackets may benefit the higher end of the market. Savvy investors will be looking for “nuggets” in the code that turn out to be diamonds in the rough.
Watching the Tax Experts
While there is still quite a bit of confusion out there, as everyone from accountants to tax attorneys navigate through the new code, the picture is beginning to clarify. Just recently, TurboTax updated its TaxCaster tool to allow it to forecast taxes and refunds based on the 2018 code. Users just input their 2017 information, and TaxCaster will generate a side-by-side comparison of 2017 and 2018 refunds or payments. Expect there to be more tools and resources introduced in the coming months.
Informed Agents Will Be Invaluable
The changes in the tax code could equate to hundreds, thousands, or tens of thousands of dollars. They could also influence such decisions as: how large of a mortgage loan to take out; where to live; whether or not to purchase a fixer-upper; or buying an investment or vacation property. More than ever, home buyers, sellers and investors are relying on knowledgeable real estate professionals to help guide and advise them. AveryHess, Realtors is putting together programs that will ensure our agents are trained on new tax law changes, as well as seminars that will cover strategies for helping clients achieve their real estate goals while optimizing their tax deductions.
Something for Real Estate Pros
The lower corporate tax rate spills over to pass-through businesses such as sole proprietorships and limited liability companies (LLCs) which can apply to most real estate professionals. There’s also a provision for an up-front deduction of 20 percent of net business income. Both of these changes carry certain requirements, conditions and limitations.
The main takeaway is the real estate industry will adjust to the new tax system, and clients should work with their agents and tax experts to optimize their deductions. But homeownership is also more than just tax advantages, it’s the intrinsic value of pride of ownership, creating a lifestyle, and building a legacy.
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