Disclaimer: This guide is not meant to be a resource for tax advice but instead a resource for basic information concerning only certain aspects of the new tax code and how they may impact the real estate market. You should get tax advice from your accountant or tax preparer who will explain how the entire tax code will affect your personal return.
This information comes immediately after the new tax code became law. Some of the information may be revised as the analysis of the new law evolves.
When the tax code was originally being overhauled by the House and the Senate, there were three major proposals being considered that would have substantially impacted the residential real estate market:
1. Exclusion of gain on sale of a principal residenceOriginal Proposal: Owners would need to live in their house for at least 5 out of the last 8 years to claim this exemption. Under the former tax framework, a typical owner, who has lived in their house for at least 2 years out of the last 5 years, would pay nothing in capital gain taxes if they sell the house.
The New Tax Code: No change. The “at least 2 years out of the last 5 years” requirement is unchanged.
Impact on the Market: None.
2. Mortgage Interest DeductionOriginal Proposal: Reduce the limit on the mortgage interest deduction (MID) amount from $1,000,000 to $500,000.
The New Tax Code: Reduces limit on deductible mortgage debt to $750,000 for new loans taken out after 12/14/17. Current loans up to $1 million are grandfathered.
Impact on the Market: Assuming a 20% down payment, this reduction in the MID will impact buyers that are purchasing a home between the prices of $938,000 and $1,250,000. Any home under the lower price is still covered and any home over the higher price was not covered under the former tax code either.
What does that mean to the market? Experts disagree. Calculated Risk’s Bill McBride:
“I think the impact of reducing the MID from a maximum of $1 million in mortgage debt to $750 thousand in mortgage debt will have very little impact on the housing market.”
On the other hand, Capital Economics claims:
“The impact on expensive homes could be detrimental, with a limit on the mortgage interest deduction raising taxes for those that itemize.”
3. State and Local Taxes (SALT)Original Proposal: The elimination of the state and local tax deduction (which includes property taxes).
The New Tax Code: Allows an itemized deduction of up to $10,000 for the total of state and local property taxes and income or sales taxes.
Impact on the Market: Most experts agree that higher taxed regions will be impacted as homeowners in those communities now have a cap on these deductions.
Calculated Risk’s Bill McBride stated:
“SALT will have an impact on housing in some areas. Some people might choose to live in one state over another (if they have a choice), based on taxation. This could impact demand in certain states – especially for the middle and upper-middle class homeowners.”
Mark Zandi of Moody’s Analytics said:
“The impact on house prices is much greater for higher-priced homes, especially in parts of the country where incomes are higher and there are thus a disproportionate number of itemizers, and where homeowners have big mortgages and property tax bills.”
What will be the overall impact on the housing market?For most of the country, the new tax code will not have a negative impact on the market. As Capital Economics reports:
“Given most households will see an overall tax cut, and potential buyers are likely to put that saving towards their home, we doubt it will have a significant detrimental impact on the housing market.”
There is also no doubt that some higher priced, higher taxed regions will be affected more than others. However, most experts agree that other portions of the tax code will favor the high-end buyer and seller, and this might mitigate many concerns. McBride explains:
“The corporate tax cuts (and other tax cuts) will mostly benefit the wealthy, and this will be a positive for high end real estate.”
What does this all mean to you?To know for sure, you should sit with your accountant or financial planner and explore how all the aspects of the new code will impact your family.
Most families consider homeownership an essential part of the American Dream, and don’t purchase a home based solely on the tax advantages. The main reasons they buy a home are personal (they just got married, they are looking for a good place to raise children, they want to be near friends and family, they want to better enjoy their retirement, etc.). This will never change.
Looking at the new tax code, Mr. McBride’s opinion makes the most sense:
“There will be some negative impact based on SALT, but overall the impact of these policy changes on housing will be minimal.”
It all started when I bought my husband the TB12 Method book by Tom Brady and some other guy. After trying out TB12 packaged meals from PurpleCarrot.com (#eatlikeagoat), we were both looking forward to a few more Tom Brady recipes.
Unfortunately, my husband’s disdain for certain vegetables narrowed our options. But the Brady Bowl is certainly a winner and it won the lunch meal prepping recipe for a couple weeks. Kale, sweet potato, and curry sauce. The first batch didn’t cause any problems. The second batch left some slight staining down the middle of the door. One wash later our dishwasher looked like this.
Now, our dishwasher is maybe 16 years old. It was in rough shape in the first place. Like the wheels on the bottom rack inexplicably popping off so often that we gave up and have a wheel grave in the junk drawer. Yes, we could replace the dishwasher but we’re currently exploring the possibility of expanding our tiny home since it’s the smallest house on this side of West Boylston.
Lucky for me, as a real estate agent I have come across stained dishwashers before and being the resourceful gal I am, I was able to track down a method of cleaning a dishwasher for a client once and this gave me the opportunity to share it with my clients. You’ll never guess what works!
Tang! Yes, the powdery orange drink you remember from your childhood. If you’re at least as old as me.
The packaging may have changed since the 80s, but it is still that sweet citrusy orange drink. At least it smelled the way I remembered it. Alas, no Tang was mixed with cool water from this container. It was for plastic cleaning purposes only.
So this is how I did it:
1. Empty the dishwasher.
2. Turn on the hot water in the sink faucet.
3. When the water is hot in the sink, turn the dishwasher on and let it run on a “Normal” cycle for 2-3 minutes.
4. Open the dishwasher and fill soap dispenser up with Tang and close it. Then empty what’s remaining in the container of Tang into the bottom of the dishwasher. I poured it right in the center.
5. Let the dishwasher complete it’s cycle.
Clean dishwasher. 😁
47 Fairlawn Cir, Shrewsbury, MA
$Click for current price
The other listings that do come out in the spring will represent increased competition to any seller. Do a greater number of homes actually come to the market in the spring, as compared to the rest of the year? The National Association of Realtors (NAR) recently revealed the months in which most people listed their homes for sale in 2016. Here is a graphic showing the results:
That number spiked to 2,140,000 by May!
What does this mean to you?
With the national job situation improving, and mortgage interest rates projected to rise later in the year, buyers are not waiting until the spring; they are out looking for a home right now. If you are looking to sell this year, waiting until the spring to list your home means you will have the greatest competition for a buyer.
It may make sense to beat the rush of housing inventory that will enter the market in the spring and list your home today.
Here is how NAR defines the index:
“The Housing Affordability Index measures whether or not a typical family earns enough income to qualify for a mortgage loan on a typical home at the national level based on the most recent price and income data.”
Basically, a value of 100 means a family earning the median income earns enough to qualify for a mortgage on a median-priced home, based on the price and mortgage interest rates at the time. Anything above 100 means the family has more than enough to qualify.
The higher the index, the easier it is to afford a home.
Why the concern?The index has been declining over the last several years as home values increased. Some are concerned that too many buyers could be priced out of the market.
But, wait a minute…
Though the index skyrocketed from 2009 through 2013, we must realize during that time the housing crisis left the market with an overabundance of housing inventory with as many as one out of three listings being a distressed property (foreclosure or short sale). All prices dropped dramatically and distressed properties sold at major discounts. Then, mortgage rates fell like a rock.
The market is recovering, and values are coming back nicely. That has caused the index to fall.
However, let’s remove the crisis years and look at the current index as compared to the index from 1990 – 2008:
The Housing Affordability Index is in great shape and should not be seen as a challenge to the real estate market’s continued recovery.
Even if you are in a market that is not as competitive, knowing your budget will give you the confidence of knowing if your dream home is within your reach.
Freddie Mac lays out the advantages of pre-approval in the My Home section of their website:
“It’s highly recommended that you work with your lender to get pre-approved before you begin house hunting. Pre-approval will tell you how much home you can afford and can help you move faster, and with greater confidence, in competitive markets.”
One of the many advantages of working with a local real estate professional is that many have relationships with lenders who will be able to help you with this process. Once you have selected a lender, you will need to fill out their loan application and provide them with important information regarding “your credit, debt, work history, down payment and residential history.”
Freddie Mac describes the 4 Cs that help determine the amount you will be qualified to borrow:
- Capacity: Your current and future ability to make your payments
- Capital or cash reserves: The money, savings and investments you have that can be sold quickly for cash
- Collateral: The home, or type of home, that you would like to purchase
- Credit: Your history of paying bills and other debts on time
Many potential home buyers overestimate the down payment and credit scores needed to qualify for a mortgage today. If you are ready and willing to buy, you may be pleasantly surprised at your ability to do so as well.
One great example of an agent who is in your corner and is always looking out for your best interests is one of the main characters on ABC’s Modern Family, Phil Dunphy.
For those who aren’t familiar, the character Phil is a Realtor with a huge heart who always strives to do his best for his family and his clients.
In one recent episode, Phil even shared the oath that he created and holds himself accountable to:
"On my honor, I promise to aid in man's quest for shelter, to recognize I'm not just in the business of houses -- I'm in the business of dreams in the shape of houses. To disclose all illegal additions, shoddy construction, murders, and ghosts. And to put my clients' needs before my own."
While this might seem silly, and it was definitely written with humor in mind, the themes of helping someone achieve the American Dream and putting a client's needs above your own are not to be taken lightly.