At the end of December 2017, the Tax Cuts and Jobs Act was signed into effect. Although the results of this new bill are still purely speculation, analysts have started projecting outcomes. Here are some guesses about how you can expect the tax bill to impact the real estate market in the next year.
Just remember, for every negative, there is also a positive. We'll do our best to explain the potential negatives and positives of this bill. However, many people believe that this will be negative for the real estate market. For example, the National Association of Home Builders and the National Association of Realtors opposed this bill. Here are some reasons why they may have come to this decision.
Increased Standard Deduction
Whether you’re single or married and joint filing, your standard deduction is about to practically double. This means that many people will possibly choose to take the standard deduction. Therefore, fewer people will take a mortgage interest deduction. With fewer people taking the mortgage interest deduction, some analysts predict that this could lower housing prices.
Lower housing prices is a double-edged sword. On one hand, if property prices decrease, there may be a decrease in the number of listed properties as people wait for their property values to increase. The flip side is that lower prices could attract more first-time buyers who may have previously been afraid of inflating prices.
Another possible benefit from this situation is that some analysts believe the real estate market is currently in a bubble. This bubble could lead to the collapse of the real estate market similar to the collapse from 2006-2008. By decreasing property prices, we avoid this market crash.
The $10,000 Cap on State and Local Tax Deduction
The new tax bill includes a $10,000 cap on state and local taxes that you can deduct from your federal tax return. For some people, this can be a huge hit. Let’s say you’re used to paying $90,000 in state and local taxes. Previously, you have been claiming that full amount. Now, you can expect an $80,000 decrease.
Here’s how this applies to real estate: First, If you live in a city or state with significantly higher taxes than your neighbor, your market could really dry up. This is, of course, really great news for the less expensive neighbors who could see an increase because of this.
Second, for areas where state and local taxes tend to be higher, people might decide to rent instead of purchase. It’s possible that people might take a wait and see approach to figure out exactly how this new tax bill impacts the market, and while they wait, they’ll rent.
Deductions on Mortgages up to $750,000
According to the Washington Post, “The law allows interest to be deducted on mortgages only worth up to $750,000, instead of the previously existing $1 million limit (people who got loans before Dec. 15 are grandfathered into the $1 million limit).” Also, existing mortgages will be grandfathered in. Therefore, the people truly impacted by this are people with mortgages between $750,000 and $1,000,000 and people who are currently interested in buying.
People who have mortgages larger than $750,000 may decide to stay put for a while. It makes sense for them to stay where they are until their mortgage decreases. This could potentially impact the sale of luxury homes. However, it has been noted that many luxury home sales involve cash, so it’s possible that this impact may not be as significant as analysts predict.
The upside of this decrease is that it helps to fund some other portions of the tax bill. President Trump claims that this new tax act will put money back into American pockets and encourage a new boom in business. Analysts are skeptical about whether this tax act will do either of those things, but time will tell.
To stay informed about the latest area trends, contact Bozeman Montana Real Estate.net. Our realtors can help you understand what the real estate market is doing and help you make the right realty decision. To contact us, visit our website or give us a call at 406.556.7188.