With the new tax bill coming into effect, many are wondering how it will affect our local market. Here are four ways the bill will and won’t impact us.
Looking to sell in the Stafford/Fredericksburg area? Get a free Home Price Evaluation
I’m sure that many of you are aware that a new tax law has been passed. There is a lot of uncertainty about how it may affect real estate, so today I’m going to talk about four relevant changes and how they may affect us in our local market.
The first of those changes is that the deduction allowed for what you pay toward state and local taxes (SALT) is being capped at $10,000. The important thing to note is that if you pay more than $10,000 in state and local taxes (including property taxes), you won’t be able to deduct any more than the capped amount.
Here’s the positive side: the cap won’t affect a large percentage of home sellers or homeowners in the area. This is partially due to our average sales price, so while this may affect a small portion, especially on the high end of the market, it’s not likely to cause sweeping change. Take a look at how much you pay in state and local taxes to get an idea on how you may be affected.
The second important change is that the amount that can be deducted for mortgage interest paid throughout the year is reducing as well. Under the previous tax code, mortgage interest could be deducted on loan balances up to $1 million. This has been reduced to loan balances up to $750,000.
Like the first change, this will mostly affect buyers looking to buy in the upper price ranges for our area. The thing to keep in mind is if you have one or more mortgages with total balances of up to $1 million, you are grandfathered into this $1 million legacy cap. Also, you can refinance your balance(s) and still be taxed based on the previous rules.
New mortgages taken out after mid-December will be subject to the new cap. If you are looking to purchase and will have total loan balances under $750,000, you will be unaffected by this change.
The third item on the list is the new tax bill’s effect on capital gains—it won’t change at all. In previous versions of the bill, congress looked at changing the amount of time that someone would have to live in their home as a primary residence to be exempt from capital gains on the sale. Until the last minute, many thought this would change from from a primary residence requirement for two of the last five years to five of the last eight years.
This would have been a massive change because one of the biggest benefits to homeownership in any area is that if you live in a home as a qualifying primary residence, your gains on the sale of that home aren’t taxable as capital gains. Our area is very transient; we’ve got a huge military contingent, tons of federal workers, and a lot of contractors that move regularly and often in less than 5 years.
Large numbers of homeowners having to pay taxes for selling before the proposed five-year mark could have had a devastating impact on the local market. Sellers could have been forced to hold their homes off the market and it would have made it a lot more expensive for many in our area to sell their home.
Targeted lobbying efforts from the real estate industry contributed to the final bill keeping the time frame at two of the past five years. This was a big victory.
The last item is something that can affect sellers anywhere. Deductions for moving expenses are no longer allowed, with the caveat that if the seller is a member of the military, those deductions can still be factored in. Keep this in mind as your factoring in your moving costs.
The big thing to keep in mind as we look at these changes is that you’re going to hear quite a bit of negative reporting. Even the National Association of Realtors has said that some of these changes could have an effect of up to 10% on prices. The key here is that locally, our average sales price will mitigate the effect of the first two changes. It won’t hit our local market as hard as areas with higher taxes or higher average sales prices.
Going into 2018, things still look really positive. There are many things that are still going our way, and for our area in particular, I don’t anticipate these changes having a big negative impact. Since I’m a real estate agent and not a CPA, I can’t give you tax advice, just my opinion as it relates to real estate. If you do have further questions about the tax bill, I can put you in contact with a CPA to provide you with more details and insight.
For any other questions regarding real estate, feel free to reach out to us. We’d be glad to help you.