How new tax law impacts real estate
By M. Dean Vincent
Tuesday, January 16th, 2018

Realtors won multiple concessions during the recent tax debate in the fight to preserve the benefits of homeownership, yet what was signed into law is expected to yield adverse impacts in some real estate markets, especially in states with high housing costs, such as California.

Efforts by the National Association of Realtors, which spearheaded the campaign, helped save the exclusion for capital gains on the sale of a home and preserved the like-kind exchange for real property.

Many agents and brokers who earn income as independent contractors or from pass-through businesses will see a significant deduction on that business income.

Yet because of the changes made by the new law, NAR projected slower growth in home prices of 1-3 percent in 2018 even as low inventories nationwide hinder sales and continue to spur price gains.

However, some local markets, particularly in high cost, higher tax states, may see price declines as a result of the legislation’s new restrictions on mortgage interest and state and local taxes.

“While the impact of this bill may not be as harmful in many parts of the country, here in California where the typical home costs two-and-a-half times the national home price, homeowners and would-be buyers will be hit especially hard,” said Steve White, president of the California Association of Realtors. “We are disappointed that Congress has passed tax reform legislation that puts home values at risk and dramatically undercuts the incentive to own a home. We hope we can work with Congress to make the necessary changes that will keep housing at the foundation of this great nation’s economy.”

It’s always wise to consult a tax expert, yet here’s a short list of the impact the new law could have on local residential real estate.

Interest deduction

For decades homeownership was encouraged and made more affordable by allowing owners to reduce their taxable income by the amount of interest paid on a home loan. For homes purchased after Dec. 15, 2017, the deduction was reduced to interest on debt up to $750,000 from the prior $1 million standard.

It includes an exception if a home was under contract before Dec. 15 and closed escrow by Jan. 1, 2018.

It’s noteworthy that the old $1 million limit will still apply for refinancing a home loan, treating the refinanced loan as if it were originated on the old loan’s date.

Property tax

As of Jan. 1, the deduction homeowners claim for payment of California property tax and state and local taxes will be limited to $10,000. The deduction had been unlimited under the old law.

Home equity debt

Owners no longer will be allowed to deduct the interest paid when borrowing against a home’s built up equity. A home equity line of credit could still be used to pay tuition or buy a boat, but lawmakers eliminated the tax advantage gained by deducting interest paid.

Capital gain

The difference between the price originally paid to purchase a house and the price received when it is sold is known as capital gain. That difference is treated as taxable income.

In a major concession, the new law does not change the capital gain exclusion limits.

If a home is owned long enough, up to $500,000 of capital gain can be excluded as income, which means the seller does not have to pay federal income tax on that amount. The exclusion is limited to $250,000 for single individuals and married taxpayers who file their tax return separately.

Vacation homes

Lawmakers considered disallowing deduction of interest paid on loans used to purchase a second home. The final version of the law retained the old standard for a primary residence and a second home, but reduced the amount of eligible mortgage debt to $750,000.

Military moving expenses

No longer can all taxpayers deduct some moving expenses when they must relocate for a new job.

The new law allows deduction of moving expenses only for members of the armed forces on active duty.

M. Dean Vincent is the 2018 chairman of the Santa Clarita Valley Division of the 9,800-member Southland Regional Association of Realtors. David Walker, of Walker Associates, co-authors articles for SRAR. The column represents SRAR’s views and not necessarily those of The Signal. The column contains general information about the real estate market and is not intended to replace advice from your Realtor or other realty related professionals.

About the author

M. Dean Vincent

M. Dean Vincent

How new tax law impacts real estate

Realtors won multiple concessions during the recent tax debate in the fight to preserve the benefits of homeownership, yet what was signed into law is expected to yield adverse impacts in some real estate markets, especially in states with high housing costs, such as California.

Efforts by the National Association of Realtors, which spearheaded the campaign, helped save the exclusion for capital gains on the sale of a home and preserved the like-kind exchange for real property.

Many agents and brokers who earn income as independent contractors or from pass-through businesses will see a significant deduction on that business income.

Yet because of the changes made by the new law, NAR projected slower growth in home prices of 1-3 percent in 2018 even as low inventories nationwide hinder sales and continue to spur price gains.

However, some local markets, particularly in high cost, higher tax states, may see price declines as a result of the legislation’s new restrictions on mortgage interest and state and local taxes.

“While the impact of this bill may not be as harmful in many parts of the country, here in California where the typical home costs two-and-a-half times the national home price, homeowners and would-be buyers will be hit especially hard,” said Steve White, president of the California Association of Realtors. “We are disappointed that Congress has passed tax reform legislation that puts home values at risk and dramatically undercuts the incentive to own a home. We hope we can work with Congress to make the necessary changes that will keep housing at the foundation of this great nation’s economy.”

It’s always wise to consult a tax expert, yet here’s a short list of the impact the new law could have on local residential real estate.

Interest deduction

For decades homeownership was encouraged and made more affordable by allowing owners to reduce their taxable income by the amount of interest paid on a home loan. For homes purchased after Dec. 15, 2017, the deduction was reduced to interest on debt up to $750,000 from the prior $1 million standard.

It includes an exception if a home was under contract before Dec. 15 and closed escrow by Jan. 1, 2018.

It’s noteworthy that the old $1 million limit will still apply for refinancing a home loan, treating the refinanced loan as if it were originated on the old loan’s date.

Property tax

As of Jan. 1, the deduction homeowners claim for payment of California property tax and state and local taxes will be limited to $10,000. The deduction had been unlimited under the old law.

Home equity debt

Owners no longer will be allowed to deduct the interest paid when borrowing against a home’s built up equity. A home equity line of credit could still be used to pay tuition or buy a boat, but lawmakers eliminated the tax advantage gained by deducting interest paid.

Capital gain

The difference between the price originally paid to purchase a house and the price received when it is sold is known as capital gain. That difference is treated as taxable income.

In a major concession, the new law does not change the capital gain exclusion limits.

If a home is owned long enough, up to $500,000 of capital gain can be excluded as income, which means the seller does not have to pay federal income tax on that amount. The exclusion is limited to $250,000 for single individuals and married taxpayers who file their tax return separately.

Vacation homes

Lawmakers considered disallowing deduction of interest paid on loans used to purchase a second home. The final version of the law retained the old standard for a primary residence and a second home, but reduced the amount of eligible mortgage debt to $750,000.

Military moving expenses

No longer can all taxpayers deduct some moving expenses when they must relocate for a new job.

The new law allows deduction of moving expenses only for members of the armed forces on active duty.

M. Dean Vincent is the 2018 chairman of the Santa Clarita Valley Division of the 9,800-member Southland Regional Association of Realtors. David Walker, of Walker Associates, co-authors articles for SRAR. The column represents SRAR’s views and not necessarily those of The Signal. The column contains general information about the real estate market and is not intended to replace advice from your Realtor or other realty related professionals.