House and Senate Tax Legislation Changes

How will the tax legislation impact real estate?

While the Senate and House have yet to agree on the legislative changes that the chambers passed this past week, it’s clear that the changes anticipated will affect owners and prospective buyers of real estate.

The key changes impact the Mortgage Interest Deduction, the State and Local Tax Deduction and the Capital Gains Exemption.  All of which we’ve briefly outlined below…

Mortgage Interest Deduction

The current Mortgage Interest Deduction (MID) is currently capped at $1,000,000.  The House proposes the cap be lowered by $500,000 while the senate proposes keeping the MID at $1,000,000.  The Houses proposal would limit MID on owners who own properties in excess of $1 Million.  This policy does not take into account for inflation.  As coastal cities valuations continue to grow, more homeowners will lose the ability to deduct their mortgage interest overtime as values appreciate.

State and Local Tax Deduction

The new legislation retains the deduction for real estate property taxes but limits the amount to $10,000.  10% of all real estate owners exceed $10,000 annually.

Capital Gains Exemption

Current rules require homeowners to live in their home for two of the previous five years in order to qualify for the exemption.  The exemption currently is that any profit on a real estate transaction is tax free on the first $250,000 of profit for individuals and up to $500,000 for married couples.  This rule would change for homeowners from two of the previous five years to five of the previous eight years of homeownership.  Under the new rule, in order for an owner to qualify for a capital gains exemption,  the owner will now need to live in a primary residence for a minimum of 5 years prior to selling.

This may reduce inventory on the market and actually increase valuations as owners of real estate elect to hold onto their properties for a minimum of 5 years in order to qualify for the capital gains exemption.  This could potentially decrease that amount of supply on the market and increase pricing due to limited supply.

Additional Negative Changes for Real Estate

Eliminates the interest deduction on all Home Equity Loans

Eliminates the deduction for ALL state and local taxes (including property taxes)

Eliminates the deduction for moving expenses with an exemption for military families

Requires a Presidential Declaration of Disaster to use the deduction for personal casualty loss

What do these changes mean for Real Estate Prices?

It’s hard to say.  On the one hand, most of the tax policies make homeownership more expensive.  That being said, most buyers of real estate rarely calculate the MID or take into account the Capital Gains Exemption.  Since buyers typically aren’t aware of deductions or Capital Gain Exemptions, it’s hard to say whether buyers will factor in these taxation policies prior to buying.

In addition, the Capital Gains Exemption could actually stop sellers from selling until they hit their 5 year timeframe.  This could cause a lack of inventory on the market as sellers hold their property longer.

As theses changes become more concrete, we will continue to update you as these proposal become concrete legislation.


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