Starting on January 1, 2018, new tax laws went into effect across the country. Some of these are anticipated to impact the real estate market, specifically, real estate professionals and homeowners as well as buyers and sellers.
When it comes to the recent federal tax reform act — known informally as “the Act” — the real estate market is likely to be affected in a number of key areas. The series of laws were passed on December 20, 2017, and include new restrictions on mortgage interest, tax deductions and more.
Here’s a closer look at how The Tax Cuts and Jobs Act may impact you as a real estate professional and your clients.
Impacts on Real Estate Professionals
Tax rate changes
The new laws include permanent reductions in tax rates on “C corporations,” or corporations that are taxed separately from their owners. These changes may apply to corporations that specialize in real estate services.
In addition, rates have been temporarily reduced at variable rates for individuals who own businesses such as partnerships, “S corporations,” REITs (Real Estate Investment Trusts) and LLCs (Limited Liability Companies) taxed as partnerships.
Real estate professionals with sole proprietorship (or pass-through) businesses will see a 20% tax deduction on qualified income. This reduction may apply to individuals who own their own real estate business.
The Act will also see new limitations on interest deductions for C corporations and pass-through businesses
Effects on the Housing Market
A likely drop in housing prices
The Act is expected to impact home prices nationwide with higher-priced homes in more affluent markets anticipated to drop the most significantly. According to a report by Moody’s Analytics published after the tax act passage, home prices could decrease by 4% nationally by summer 2019, compared to if the legislation had not passed.
Three key provisions are seen as contributing to the projected drop in home prices:
- The lowered cap on mortgage-interest deductions (MIDs) from
$1 million to $750,000.
- A cap on state and local tax deductions (SALT) of $10,000 for properties.
- The doubling of the standard deduction taken by all individual taxpayers.
Homebuyers and sellers
Both those looking to buy and sell homes will likely be affected by the new tax act. The anticipated drop in housing prices may prove a boon for taxpayers seeking to buy a new home, while individuals wanting to sell may find their asking prices are lower compared to what they could expect in previous years.
For homeowners, the new reduction in mortgage-interest caps can mean standardizing their MIDs may be more beneficial than the common practice of itemizing deductions.
Despite some of the uncertainty that comes with the new tax laws, one way to help reassure your clients is with the coverage that comes with a home warranty. American Home Shield® is here with a number of plans to cover the homes and budgets of homeowners, buyers and sellers. Explore options for you and your clients today.