This article was originally published in Real Estate Agent Magazine Twin Cities, written by Charity Malmberg, Founder and President of Trademark Title
With the new tax law taking effect as of December 2017, it seems the entire nation has been in a scramble to figure out just how the changes will affect them, their families or businesses. As a real estate agent , industry tax changes and small business taxation are two things of which you need to be aware.
Get a sneak peek from industry experts and insiders on how these new laws can and will affect you as an agent and potentially the real estate industry as a whole. Keep in mind that the insights below are intended to help you begin to get a handle on the new changes, but they do not take the place of personalized advice from a knowledgeable tax professional or financial adviser.
Deductions for interest payments on mortgages up to $1.1M are going away.
One of the biggest changes directly impacting the real estate market is the change in mortgage deduction. Current mortgage holders will be grandfathered in, “but the deductible limit drops to $750,000 for new debt incurred after Dec. 31, 2017, according to factcheck.org.
How much will this really affect the industry? It’s hard to say. “The areas that are most impacted by the cap on mortgage interest deductions – high priced coastal cities such as San Francisco, Los Angeles and New York – are all areas that have had incredibly strong buyer demand over the past several years,” says Mark Biggins, managing broker, Open Listings. “While there are certainly buyers who may have lowered their budget, or hit pause on their home search altogether, we are still expecting demand to outpace supply as we enter the selling season.”
Deductions on HELOC interest are changing.
“Homeowners will no longer be able to deduct interest paid on home equity lines of credit (HELOC) that are not considered home acquisition debt,” says real estate attorney Elizabeth Whitman. She goes on to explain that this will likely impact many homeowners as interest deductions on HELOC loans will only be allowed if funds are used to “acquire, build, or substantially improve their residence.”
You may be seeing an increase in mortgage interest rates.
The glory days of the past few years may be coming to an end, according to Senada Adžem, luxury real estate expert and media contributor. She says “Mortgage [interest] rates are expected to average 4.6 percent throughout the year, but are expected to reach 5 percent for the 30-year fixed-rate mortgage by the end of the year. This is due to stronger economic growth, inflationary pressure and monetary policy normalization.”
You might start seeing a Southern Migration.
“The removal of tax deductions for state and local income tax will cause a southern migration by empty nesters,” says Adžem. “High-tax states like New York and Connecticut will see people leave for Florida, Nevada and Texas, the three sunny states with no state income taxes. It is Florida’s six-months-and-a-day rule that will be even more important for Northeasterners.”
Small businesses can deduct up to 20% of income.
This is one area that may impact you personally. Depending on how you receive income and file your taxes, this could be a major player in helping lower your own taxes.
“Real estate brokerage firms and real estate agents should be aware that the new tax law now will allow small businesses pass-throughs (taxed as S corporations, partnerships or individuals) to deduct 20 percent of their income, subject to limitations,” says real estate attorney Elizabeth Whitman. “This change is expected to apply to independent contractors who receive forms 1099 (like most real estate agents) but not to W-2 employees.” She advises talking with a tax adviser on how to structure your business in order to take advantage of these new changes and notes that phase out for this deduction does occur.
Overall, time will tell how tax reform truly affects the housing market; some seem to see dire consequences, while others see little to no change. Staying informed and up-to-date on industry-related news and trends is still one of the best ways to ensure your business thrives and your clients are in educated hands.