As an American taxpayer, the term “tax cut” is usually welcome news. But the National Association of Realtors (NAR) isn’t so happy about the bill that passed in the House last week. Looking primarily at the effects on housing and the benefits of home ownership, the new tax law isn’t what Realtors® had hoped for.
The new legislation has varying effects on homeowners across the country. From the high-priced coasts to the more moderate mid-west, homeowners have different outcomes with some of the new proposals. Denver, with it’s high growth and continued price gains, will likely experience more of the downside of the bill.
H.R. 1, The Tax Cut and Jobs Act
The Tax Cut and Jobs Act is the bill created by the House of Representatives to bring tax relief to Americans across the board. This bill is slightly different from the one that is now in the Senate. NAR created a side-by-side comparison of each bill. In general, it seems the Senate version is slightly more favorable to the homeowner.
One factor to keep in mind is both bills raise the standard deduction, essentially doubling the current amount for all taxpayers. For many homeowners this increase will be in their favor, and some of the real estate related items will not apply. But for some homeowners, especially in Denver, the new tax bill may not create a savings.
The $500,000 Limit
In current tax law, homeowners may deduct the interest they pay on a mortgage loan up to $1 million. The new House bill reduces that amount to $500,000, meaning mortgage interest over this amount cannot be deducted. This will certainly have an effect on Denver homeowners.
From January 2017 through October 2017, more than 56,000 homes were sold in the Denver Metropolitan area. Of those sales, one-fourth, or 13,352 homes, were properties over $500,000. NAR Chief Economist Lawrence Yun forecast in early November that national home sales would increase 3.7% in 2018. With Denver’s already tight market, prices are likely to continue to rise regardless of the new cap.
Additional Pressures from the House Bill
There are other areas the NAR has issues with in both the House and Senate bills:
• Second Home Mortgage Interest – Part of the new mortgage interest limit, the House bill also excludes all mortgage interest for second homes. The proposed bill from the Senate, however, leaves this deduction in tact.
• Capital Gains Gets Tough – In the current law, a homeowner must occupy the property as their personal residence for 2 of the last 5 years in order to avoid paying capital gains. Both the House and Senate bills increase the time to five of the last eight years. Thus, purchasing a home and not living in it for at least five years will trigger capital gains on the sale.
• Home Equity Loan Interest – The interest deduction for home equity lines also goes away in both forms of the bill, however the Senate version removes the deduction for both new and current loans.
The Denver Outlook
While the National Association of Realtors continues to lobby for changes to the proposed law, how does this affect the current Denver real estate market? It has been suggested that the law would force home prices down and potentially create a housing crash. That’s probably a little extreme.
Sellers on the edge of the $500,000 list price may come down to stay under the cap to entice buyers, but purchases just over the half million dollar mark will have little effect on the buyer’s taxes. The Denver market will remain tight with limited inventory into 2018, so the tax consequences will have a minimal impact on home sales.
Vacation home sales may see some pull back, and perhaps the biggest issue will be the capital gains requirement to stay in the home for 5 of the last 8 years. This will likely have an impact on generating new listings. In the end, this bill still must pass through the senate, and there are certainly changes that will take place in the process.