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Tax Reform & Housing: A Reference Guide

Anthony D'Alicandro

Anthony is a licensed Real Estate Broker in NJ & PA...

Anthony is a licensed Real Estate Broker in NJ & PA...

Feb 7 9 minutes read

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:

  • Changing the requirements for the exclusion of gain on the sale of a principal residence
  • The reduction on the limit of the Mortgage Interest Deduction (MID)
  • The elimination of the State and Local Tax deduction (SALT) which includes property taxes

Let’s look how the tax code has evolved from the original proposal, and decipher what impact experts believe it may have on the housing market.

What about the three major concerns of real estate?

1.  Mortgage Interest Deduction

There was concern that the mortgage interest deduction (MID) would be eliminated. That didn’t happen.

The New Tax Code: the bill has made the following changes:

Reduces limit on deductible mortgage debt to $750,000 for new loans taken out after 12/14/17 (from the existing $1,000,000). Current loans up to $1 million are grandfathered.

Homeowners may refinance mortgage debts existing on 12/14/17 up to $1 million and still deduct the interest, so long as the new loan does not exceed the amount refinanced.

Repeals deduction for interest paid on home equity debt through 12/31/25.

Interest is still deductible on home equity loans if proceeds are used to substantially improve the residence.

Interest remains deductible on second homes, but subject to the limits.

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.”


2.  State and Local Taxes (SALT)

There was concern that the state and local tax deduction (which includes property taxes) would be eliminated. That didn’t happen.

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.”


3.  Exclusion of gain on sale of a principal residence

There was concern that owners would now 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 new code will remain the same as the old.

Impact on the Market: None.


Other links that might help:


TAX CUTS AND JOBS ACT

The final proposal put up for vote by the Conference Committee.


H.R. 1 – The Tax Cuts and Jobs Act

The National Association of Realtors’ (NAR) Issue Brief. More information on other aspects of the bill.


Summarizing the impact on the real estate market?

Please read disclaimers at the top of this page.  


Interactive Heat Map: 

Metro Areas Most Affected by the New Tax Law


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.”


The most thorough analysis of how tax reform will affect the housing market has come from Capital Economics. Here are some highlights:

The tax bill could raise the net costs of buying. But, 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.

Most households stretch themselves when buying a home, and to the extent that the new code will cut taxes for most households, the overall change could be positive for the housing market.

The impact on expensive homes could be more detrimental, with a limit on the mortgage interest deduction raising taxes for that itemize.

Here is their full analysis (7 pages): US HOUSING MARKET FOCUS: Buying still better than renting in the long run


Calculated Risk’s Bill McBride weighed in on the subject. Here are some highlights:

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.

State and local taxes (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.

The corporate tax cuts (and other tax cuts) will mostly benefit the wealthy, and this will be a positive for high end real estate.

There will be some negative impact based on SALT, but overall the impact of these policy changes on housing will be minimal.

Here is his full analysis: A few comments: Housing and Policy


More Helpful Links & Information

Please read disclaimers at the top of this page.  

How Tax Reform Impacts Homeowners in Each State

This site, run by NAR, hopefully will be updated now that the tax reform bill has become law. It gives you state-by-state data on tax deductions, capital gains exemptions, and the potential impact on housing prices from the 2017 tax reform framework. You can download information for your state by clicking their map.


Which Places Pay the Most in Property Taxes?

This site gives you an interactive map where you can find the median property taxes by county.


Reforming the mortgage interest deduction: A chance for fairness for American taxpayers?

This article gives the argument for why the changes made sense. We are not saying we agree so please don’t attack us for the content. We just want you to better understand the other side, so you are prepared for those conversations.


And remember…

Some people will overreact to any change. In the current political environment, reactions from both sides may be even more passionate.


In the end, Jason Furman, a Harvard Kennedy School economist, may be proven correct:

“Nothing in my experience suggests that the views people have about the tax cuts – whether justified or not – will change after they start actually being affected by them.”

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