Depends on who you ask.
The last time the U.S. tax code was changed, Magnum, P.I. and The A-Team were the hottest television shows, and our kids were playing some new device called the Nintendo Entertainment System. A lot has changed since 1986, except for Tom Selleck’s mustache, so perhaps it was time to update the tax code.
This question remains for most Americans and small to mid-size business owners: What effect will the changes have on their bottom lines?
For homeowners, real estate professionals, and the housing market in general, the next several years may see a combination of positive and negative consequences. And, if your accountant hasn’t already informed you of their fee to interpret the implications of the new codes on your tax bill for 2018, be forewarned.
Analysis by the Tax Policy Center indicates higher income households and larger businesses will receive the largest average tax cuts as a percentage of income.1
The changes outlined in the Tax Cuts and Jobs Act could upset the intricate balance between the housing market and current and future homeowners. Here’s a look at how.
Prospective and Current Homeowners
The Good News
A large majority of Americans will pay less in taxes (at least until cuts expire in eight years), but how much less varies. According to President Trump, you could pay up to $2,000 less,2 but your accountant will need to figure out the exact amount. Everyone’s standard deduction will double, which will make itemizing deductions a thing of the past for many people.
In addition, the tax rate for higher income individuals will drop, and the income thresholds to kick in will increase. Plus, the tax credit per child will increase to $2,000, which everyone will receive whether you owe the IRS or not. And, there will be no changes to 401ks, IRAs or Roth IRAs, so hopefully most Americans will continue to sock away for retirement.
The Not So Good News
There will be a new cap of $10,000 on state and local tax deductions, including property taxes, which spurred a rush of pre-paid property taxes at the end of 2017 in areas with high property values and taxes. In addition, the amount homeowners can deduct for mortgage interest will decrease (on new loans only) with the cap on loans decreasing from $1 million to $750,000.
The Good News
Supporters of the tax bill say that it will spur economic growth and provide some relief to Americans at all income levels, which seems to promise healthy markets all around. The retention of deductions on second homes and the preservation of capital gains on the sale of homes are both positive outcomes of the bill.
The Not So Good News
Opponents argue that any growth in the economy will be short-lived and restrained, and any tax relief will expire after eight years (much shorter than your average mortgage loan). The changes to both mortgage interest and property tax deductions may hurt home values in areas with high property taxes. This could lead to less money for schools and infrastructure, which are selling points to many prospective buyers.
Housing demand may take a hit as prospective buyers weigh the value of owning vs. renting, minus important tax incentives. For now, most experts say demand will slow as buyers adopt a “wait and see” attitude.
Meanwhile, New York City already posted a drop in home sales during the last quarter of 2017. This luxury market is expected to suffer along with Chicago and San Francisco, among others. See which areas are expected to be hit the hardest.
Historically, the tax code has favored homeownership and allowed Americans to reduce their tax burden significantly by owning vs. renting. Many experts are concerned the changes in the tax bill will reverse this trend, or at least in the perception of prospective homeowners.
Moody’s Analytics predicts that, due to the tax law, housing prices will be 4% lower nationally than they would have been by mid-2019.3
Real Estate Professionals
The Good News
Along with the tax cut for large corporations like Walmart and AT&T comes a reduction for pass-through companies (a new 20% reduction). These businesses are often structured as an S corp or partnership where the business itself is not taxed, but the owner of the business is taxed as a part of their individual return.
This is an historic change in tax laws that will apply to many professionals. This could give companies additional relief to invest in improvements to grow their business in the near term, since this cut will expire in eight years.
The Not So Good News
Given the outlook for the housing market in general, real estate professionals may need to be satisfied with the pass-through deduction.
It is the largest, one-time tax cut for corporations in U.S. history (from 35% to 21%), which translates into trillions of dollars over the next decade.2
As we gear up for tax time, most Americans will not see much change on their 2017 returns, but they should begin to see some initial effects of the new bill as 2018 progresses. Some larger corporations have already announced altruistic plans for their tax savings that will hopefully benefit the average worker.
Accountants and lawyers will continue to wrestle with the new codes, and most GOPers concede there will be implementation issues and follow-up bills needed. For now, talk to your tax professional for expert advice on the implications of the tax bill on your own business…and maybe play a few levels of Super Mario Bros. for some consistency in life.
This article is for informational purposes only.
1“Analysis of the Tax Cuts and Jobs Act.” Tax Policy Center, Urban Institute & Brookings Institution, 18 December 2017, www.taxpolicycenter.org. 18 January 2018.
2Long, Heather. “Analysis | The final GOP tax bill is complete. Here’s what is in it.” The Washington Post, WP Company, 15 December 2017, www.washingtonpost.com. 18 January 2018.
3Gregg, Kathy Orton and Aaron. “New tax law expected to slow rise of home values, creating winners and losers.” Chicagotribune.com, 2 January 2018, www.chicagotribune.com. 18 January 2018.
Additional Online Sources
“Under the GOP bill, here’s who’s going to get a big ‘pass-through’ tax break.” PBS New Hour, Public Broadcasting Service, 28 December 2017, www.pbs.org. 18 July 2018.
Bryan, Bob. “Republicans are already acknowledging they need to fix their gigantic tax law – but that could be impossible.” Business Insider, 3 January 2018, www.businessinsider.com. 18 January 2018.
Soergel, Andrew. “GOP Tax Bill Rewards Real Estate, Oil While Hurting Hospitals.” U.S. News & World Report, U.S. News & World Report LP, 1 January 2018, www.usnews.com. 18 January 2018.
Guarnieri, Grace. “Trump tax bill could destroy Manhattan’s falling real estate sales.” Newsweek, Newsweek LLC, 3 January 2018, www.newsweek.com. 18 January 2018.