Upheaval Ahead: Tax Bill Changes Daunting to the Real Estate Market

The recently passed tax bill known as the Tax Cuts and Jobs Act is poised to shift many financial realities. The housing industry is far from immune to the changes it will bring.


Home Values Jeopardized


The National Association of Realtors spoke out against the bill before its passage, warning that the changes it promises would lower home values across the country. The cumulative effects of changes to tax deductions, as well as interest and moving expenses, would act in concert to lower home prices. The NAR warns prices could fall by as much as 10%.


Related to the potential for lowered home values is the problem of inventory. Home inventory is already at a historic low. If fewer homeowners can sell, that will restrict the amount of inventory on the market even further. High-tax states would struggle the most.


Homeowners Hit Hardest


However, from an industry standpoint, the completed version of the bill is an improvement from the original draft version. That version, which passed through the House before meeting defeat in the Senate, also drew an outcry from the NAHB.  They approved the final version. But one feature hasn’t changed—the bill remains unfriendly to many homeowners.


It chips away at what has long been a pillar of home ownership in the US: the mortgage interest deduction. Although the deduction remains in place for mortgages up to $1 million, it takes away the deduction for interest paid on home equity debt.  There would be a higher standard deduction – virtually doubled. Plus the capital gains exclusion can only be used on one sale every five years, instead of one sale every two.


Changes to the capital-gains tax may incentivize homeowners to stay where they are, as moves would become riskier.


Of course, the bill would affect different states in different ways. Builders in New Jersey would be particularly affected, as will those in Connecticut, Illinois, New Hampshire, Maryland, Rhode Island, and Virginia. Builders in Wisconsin, Georgia, Minnesota, New York, Ohio, Pennsylvania and Texas may also feel the effects of the bill.


In the meantime, expect confusion to be its own road block. Buyers and sellers may take months to come to terms with the new system. One New Jersey real estate broker reports he lost a $1.4 million sale due to buyer confusion over the effects of the tax changes.