This month, House and Senate Republicans have each unveiled their long-awaited Tax Reform Plans to overhaul the U. S. Tax Code. Both proposed Tax Reform Plans differ in significant ways especially with regards to real estate. While there are numerous significant changes to the current Tax Code as a whole, state/local tax deductions and mortgage interest deductions are the key areas of both Tax Reform Plans that could have the most significant impact on real estate.
- State and Local Tax Deductions: The House Tax Reform Plan proposes to allow taxpayers the ability to deduct local property taxes on their federal tax returns up to $10K.
The Senate Tax Reform Plan proposes to eliminate all state and local deductions (“SALT”). Under the Senate Tax Reform Plan, taxpayers would lose the ability to deduct their state and local property and other taxes on their federal tax returns. Both proposals could be a hit to homeowners in high tax states such as New York, New Jersey, Connecticut and California.
- Mortgage Interest Deduction: The House plan proposes to reduce the mortgage interest deduction for primary residences to $500K on new mortgages but keeps the $1M cap for existing homeowners. Whereas, the Senate plan proposes to preserve the current mortgage interest deduction for primary residences by allowing taxpayers to deduct the interest they pay on the first $1M of mortgage debt. The House Plan would also eliminate the mortgage interest deduction fro second homes.
Housing industry experts are on the record saying that lowering how much mortgage interest homeowners deduct would increase the cost of buying a home, slow down construction and discourage people from buying. If I currently own a home with a mortgage between $500K and $1M, I can deduct all of the mortgage interest. But if I sell my home and finance a similar priced or more expensive property, I would only be able to deduct mortgage interest on the first $500K. So some way decide that it makes more sense to stay put.
It should be noted that the number of homeowners who claim that deduction would drop significantly since both the House and Senate Plans include almost doubling the standard deduction resulting in fewer people to itemize.
- Capital Gaines Tax on Sale of Primary Home: Current law allows sellers to generally exclude $250K or $500K if filing jointly from capital gains when selling a home provided they have lived in the home for two of the past five years. Both the House and Senate plans propose to increase the period for living in the home to five of the last eight years. The Senate Bill allows for some exceptions to the time requirement such as if seller is leaving for a job change or healthcare.
This could have an impact on mobility by creating an additional tax expense for owners of homes, as well as reducing potential profit that homeowners could see.
Although, the Tax Reform Plans under consideration could ultimately create a negative impact on residential real estate; commercial property owners would see several benefits including lower taxes on their profits and the ability to avoid a 30% limit on interest expense deductions. Both bills would also preserve the 1031 exchange which allows property owners to avoid being taxed on profits from property sales if they reinvest those profits into real estate.
Both proposed Tax Reform Plans would have a potentially significant impact on the real estate market in South Florida. It will be interesting to see how the House and Senate Plans evolve over the coming weeks. If the Republicans want a Tax Code overhaul by the end of 2017, both the House and Senate will eventually have to agree on one Tax Reform Bill. Expect the powerful real estate lobby to work hard to counter attempts to reduce or eliminate the mortgage interest deduction.
Should you have any interest in buying or selling real estate in South Florida and you are not currently working with a real estate agent, please do not hesitate to contact me atjaykenney@SFPropertyTeam.com or 954-547-9483.