On Thursday, November 9th, Republicans in the Senate Finance Committee released an outline of their version of the “Tax Cuts and Jobs Act”. Just one week earlier, the Republicans’ congressional House Ways and Means Committee released the original version. Both pose a threat to homeownership as we know it today. Here is a short summary of how both may affect your real estate.
Mortgage Interest Deduction
The house bill will keep the mortgage deduction, however it will lower the maximum amount you can deduct from $1,000,000 to $500,000. The Senate bill will not change mortgage interest deductions, but both bills may make the mortgage interest deduction irrelevant for many.
The Senate bill changes the standardized deduction to $24,000 for married couples filing jointly and $12,000 for single filers and the House bill raises it to $24,400 for married couples and $12,200 for single filers. Both bills also eliminate nearly all state and local deductions while keeping charitable giving deductions. As a result, it will not make sense for most, besides the very wealthy and the very charitable to itemize deductions. (source)
Furthermore, under the House bill, homeowners will no longer be able to deduct the interest they pay on home equity loans, second home loans, nor any loan that is for a home other than their primary residence.
As a result, the incentive to buy and the tax-benefits of owning a home will be greatly reduced. Did you know that congress has been incentivizing homeownership with the tax code for over 100 years, primarily with the mortgage interest deduction? One thing is clear: these changes are poised to cause a major shift in the real estate market.
The House bill will raise estate tax exemptions for single filers from $5.6 million to $10 million and repeal the tax entirely after six years. The Senate would raise the exemption to $11.2 million. This will largely benefit affluent families. According to the Joint Committee on Taxation, 99.8 percent of estates owe no estate tax at all. Currently, only the estates of the wealthiest 0.2 percent of Americans end up paying this tax because of the tax’s high exemption amount, which has jumped from $650,000 per person in 2001 to $5.49 million per person in 2017. (source)
The house bill will eliminate the generation-skipping transfer tax after six years, while the Senate bill would leave it as is.
According to this article, the congressional tax plan will dramatically reduce affordable housing.
In last month’s Santa Cruz Real Estate Digest, we wrote about a CA affordable housing package. It consisted of over a dozen affordable-housing bills that were signed into law. These plans were predicated on the assumption that the tax-based federal financing mechanisms related to affordable housing would remain. The congressional bill would call for the elimination of tax-exempt private activity bonds, which developers use to finance construction that benefits low-income buyers. This poses a major threat to both these newly signed bills and pre-existing affordable housing programs.
The Senate’s bill would not have as dramatic an effect, however it would reduce the value of low-income tax credits. As Michael Novogradac, managing partner of Novogradac & Company puts it:
“The House bill would drastically reduce the future supply of affordable housing, whereas the Senate bill would only damage it”
Read More here.