Anita Clark is a residential real estate agent based in Houston County, Georgia. You can find more of her work on her blog covering Warner Robins real estate. The opinions expressed are those of the author and don’t necessarily reflect those of Quicken Loans.
For most people in the real estate industry, the ripple effect emanating from the new tax laws seems to be a bit confusing. In fact, the question on many homeowners’ minds is pretty obvious: How will they be affected by the tax bill?
Yes, the new tax plan seems to have left many confounded, owing to the fact that some feel like it’s an improvement that’s meant to better the lives of the American people while others think otherwise. To allay any bits of confusion that may be lurking around the new bill, here is an in-depth look at how the tax bill may affect local real estate markets.
The Property Owners Dilemma: Understanding the New Tax Bill
Home Equity Loans
In the past, homeowners were allowed interest deductions of up to $100,000 on their home equity loans regardless of how the funds from such loans were used. This meant that homeowners could use the funds for expenses that were not related to home improvement, like buying a car, paying for a child’s tuition or funding any other purchases outside their homes.
However, the new tax bill has closed this loophole by eliminating interest deductions for home equity loans spent outside the home. This means that you will have to spend your home equity loan on home improvement in order to qualify for interest deductions.
Unlike last year’s $1 million cap, the new tax bill has reduced mortgage interest deductions to a total of $750,000 of mortgage debt for first or second homes. Current homeowners will remain chained to the $1 million limit. And while this may seem favorable for new home buyers within the $750,000 limit, anyone looking to buy property from expensive markets is bound to experience a tax disincentive.
Unfortunately, this ripple is also going to make it hard for property owners in expensive markets to sell their homes. Potential sellers need to keep this in mind, as buyers may be finicky, and the process could take a lot longer than usual.
This year’s new tax laws have also replaced the unlimited federal deduction for property taxes, state income taxes and local income taxes with a $10,000 cap. This means that homeowners will only be allowed a maximum deduction of $10,000, unlike in the past, where they could deduct the amount in full.
This is definitely not good news for homeowners residing in high-tax states like New York, California and New Jersey, or anyone with a heavy property tax burden.
This is yet another area that had its own fair share of changes. That’s because the new tax laws have eliminated the moving expenses deductions. The previous laws allowed homeowners to deduct moving expenses in fair amounts if they met certain requisites. That is no longer the case!
This could be detrimental to those who move around frequently, such as members of the military and contractors. Know what you can and cannot claim, and be prepared to offset it with your own funds.
Well, the tax laws on capital gains exclusion remain unaltered when it comes to selling a home. There were proposals to make a few cuts to the exclusion, but these proposals never made it to the signing table. This law still allows married filers to exclude up to $500,000 if they’re selling their first home, but only if they have lived in it for at least two of the last five years.
Changes to Expect in 2018’s Local Real Estate Markets
As mentioned earlier, these tax reforms have affected buyers and sellers in many different ways, or they will soon. Some will benefit, while others will be worse off. The real estate realm will start to feel the pinch of these new laws soon, if it hasn’t already begun, starting with a decline in home sales that will be triggered by the reduced mortgage interest deductions.
Property markets in highly priced regions are bound to bear the brunt of these massive tax law changes. The decline in mortgage interest deductions coupled with the $10,000 deductible property tax limits is bound to discourage sales. Property prices are also bound to be revised to accommodate the high cost of homeownership in high-end markets. This may mean that new home buyers may need to chip in more cash for a piece of property in cities and coastal regions.
In truth, the revised real estate tax laws are bound to send massive ripples throughout the industry in the near future. In fact, every property owner will experience changes on their final tax bill. But if you have been in the industry for long, then you probably know that the market will stabilize in due time with a balance in supply and demand. Only time will tell how deep into our pockets these tax changes will go.
Have you already noticed changes in your region? Let us know in the comments below!
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