Tax Reform Impacts Property Owners
Congress has been debating tax reform and by the time you read this column it may or may not have finalized a bill in conference. One of the big issues relates to the tax treatment of real estate for both primary residences and vacation homes. The final bill that comes out of committee will have significant changes to the current tax code that will affect virtually all property owners to one degree or another.
Americans have gotten used to being able to deduct interest on mortgages up to $1 million for their primary residence. This could drop to $750,000 under the new bill. Also, there is currently a very substantial capital gains exclusion that has allowed people to sell their primary residence every few years and trade up or down with minimal tax consequences. These 2 things have been a driving force behind price appreciation and the recovery of the real estate market nationwide since coming out of the Great Recession.
Retaining the current format of the capital gains exclusion for a primary residence is critical to the health and growth of the housing industry. First time buyers routinely trade up to larger and more expensive properties as their income and family size grows. If the holding period is extended to potentially as long as 8 years, it will become more difficult for growing families to trade up without incurring significant tax consequences. The net result could be a substantial decrease in the volume and velocity of residential real estate sales.
Congress may limit the mortgage interest deduction in a way that could negatively impact buyers of primary residences and vacation homes. However, they might retain or increase the interest deduction for investment properties. So, anyone buying a vacation home might want to categorize it as an investment property and use it to generate rental income. That way they can take advantage of the mortgage interest tax deduction for investment properties. Whether or not there would be a 14 day restriction each year on owners using an investment property remains to be seen.
There is also the issue of whether or not you will be able to continue taking an itemized deduction for the property taxes that you pay each year. One of the major components of the tax bill is to dramatically increase the standard deduction for individuals while reducing or eliminating other deductions that are currently being itemized. In states where property values and / or taxes are high (e.g. California, New York, New Jersey, et. al.), reducing the property tax deduction down to the proposed limit of $10,000 per year could have a huge impact. And this 10K limit may limit the total deduction for property, state income and sales taxes combined.
If nothing else the tax bill amounts to a full employment act for CPAs and attorneys. Let's not confuse this with a major restructuring and simplification of the US tax code. While low to middle income wage earners might have a simpler tax return to file, anyone who gets 1099s, K-1's, or owns multiple properties will still likely be paying for professional tax services. If a tax bill does finally pass Congress, it behooves all property owners to fully understand it at the earliest opportunity. Owners of both residential and investment properties can only wait and hope that nothing detrimental comes out of Washington DC.
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Weekly Real Estate Update
Statistics gathered from the Incline Village MLS on 12/17/17
Houses Condos PUDs
For Sale 95 49 21
Under $1 million 24 32 10
Median Price For Sale $1,848,000 $649,000 $1,100,000
YTD Sales 2017 162 197 53
YTD Sales 2016 158 191 57
New Listings 10
In Escrow 7
Closed Escrow 13
Range in Escrow $395,000 - $1,278,000
These statistics are based on information from the Incline Village Board of REALTORS® or its Multiple Listing Service as of December 17, 2017