LOVELAND – As you’ve probably heard in the news, tax cuts are in the pipeline. There are many proposed changes in the tax reform, which vary a bit from the House and Senate versions of the bill. Three components of the bill directly impact homeowners. Unfortunately, they do so negatively rather than positively. Here’s a quick breakdown of what’s being discussed.
Mortgage interest deductions
One of the major benefits of home ownership is being able to deduct the interest that you pay on your mortgage. Currently, you can deduct interest on mortgages up to $1 million. Under the new plan, it would be limited to $500,000 for new purchases/mortgages.
Since this directly impacts new mortgages, it will undoubtedly alter the way people think about buying or selling a home. Will demand for homes above that range drop? Will sellers feel pressure to sell for less, especially if they’re near the benchmark? Will buyers be able to spend less given the tax implications?
The average price of homes in Colorado is just under $400,000. Many may assume that this would therefore impact fewer homebuyers. However, remember that figure is the average. Many homes in the area exceed $500,000. The National Association of Realtors (NAR) predicts that this change will cause a decline in home values.
Removing mortgage interest deductions on second homes and home equity loans is also a possibility.
Property tax deductions
Another important tax benefit for homeowners is the property tax deduction. That is also being discussed. The Senate wants to eliminate it entirely whereas the House wants to cap it at $10,000. Larger properties or those with more land will be most affected by this change.
Capital gains exemption
The last homeowner specific element relates to capital gains exemptions. Currently, homeowners can exclude $250,000 (or $500,000 if married) of gain from the sale of their primary residence if they lived in the home 2 out of the last 5 years. The proposed change would require residency for 5 out of the last 8 years. Additionally, the amount of exemption would be scaled back if past adjusted gross income (from a certain defined period) exceeds those exemption limits.
This could affect how often people choose to buy and sell. Homeowners are likely to remain in their homes for longer, in attempts to avoid paying capital gains taxes on the sale. During a time when inventory is already low, this could reduce the number of homes for sale even further!
What homebuyers should expect
Terms are still being negotiated and House and Senate proposals vary, so it’s not yet known what the final bill will look like. However, many of the changes above are likely to pass. Home buyers will need to re-evaluate what priced home is affordable given the reduced tax benefits. Home sellers will need to recalculate net earnings on sales (and money available to put towards the next purchase) given potential capital gains charges. It will certainly be interesting to see how these changes will alter inventory and home buyer activity, especially in the current “hot” real estate environment.
By Suzanne Plewes, RE/MAX Alliance in Loveland. Suzanne Plewes is a broker associate at RE/MAX Alliance. Write to 750 W. Eisenhower Blvd., Loveland, CO 80537, call 970.290.0373 or e-mail [email protected].