In San Francisco and Scarsdale, Jersey City and Greenwich, the real estate talk is the same: Just how bad will this Republican tax overhaul hurt?
Even before the GOP Congress forges a compromise bill to send to President Donald Trump, House and Senate plans are unsettling housing markets, especially in high-tax, Democratic-leaning states like California, New York, New Jersey and Connecticut.
Changes to deductions for state and local taxes, property taxes, moving expenses and mortgage interest would lower home values throughout the U.S., according the National Association of Realtors. At the same time, a change in the capital-gains tax on sales would give homeowners incentive to stay put longer, keeping houses off the market at a time of historically low inventories.
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“Tax reform could be yet another catalyst to make the housing-inventory crisis even worse than it already is,” said Ralph McLaughlin, chief economist at San Francisco-based Trulia.
Together, the changes backed by the first real estate-developer president will upend the housing market by curbing incentives to both buy and sell homes. The change in tax deductions limits affordability for struggling first-time buyers in high-priced areas, while any shifts for sellers could worsen the housing shortage.
The supply of homes for sale has decreased, on a year-over-year basis, for 29 straight months, according to the Realtors group. That streak -- one month shy of the record -- is likely to keep going, according to Realtor.com.
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Builders can’t be counted on to save the market. Construction is well below the pace that was typical before the 2007-2008 financial crisis. Danielle Hale, chief economist at Realtor.com, said that homebuilding will start to ease inventory shortages in the second half of next year -- as long as tax reform doesn’t mess that up.
Inventories are dropping all around the country. The number of listings in Denver decreased 73 percent since the beginning of 2010, when Trulia started compiling data. The number of available homes fell 67 percent in Charlotte, North Carolina, 55 percent in Dallas, and 56 percent in Atlanta.
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A study from Congress’s own bipartisan think tank finds the biggest beneficiaries of the tax cuts will be the wealthiest Americans, even as Republicans pitch the tax revisions as a benefit for the middle class. While housing affordability is always an issue, many Americans buy a home when they relocate for a new job, get married or start a family regardless of economic conditions.
The Senate bill makes all of its tax changes for individuals temporary, wiping them off the books in 2026. That would include the repeal of the state and local income tax deduction and the $10,000 limit on the state and local property tax deduction.
Flee to Florida
Reducing tax benefits to homeownership may hurt values, while motivating potential sellers to stay in their homes longer could have the reverse effect. How the dynamics play out remains to be seen.
The tax changes “are being done to make the corporate tax cut work, and not being done to make the housing market work,” said Redfin chief economist Nela Richardson.
The loss of tax advantages in high-tax states has real estate people in places like Florida preparing for more business. Mike Pappas, chief executive officer of Keyes Co., a Miami-area real estate broker, said the changes could accelerate migration to states like his, where there’s no state income tax.
“There’s tremendous pressure from millennials coming into the housing market,” Pappas said. “The last thing we need is another deterrent for people to hold on rather than sell.”
Movers would have to overcome a countervailing force -- changes in capital-gains tax, which sellers pay on the profit they make on home sales. Changes in that tax would make it less likely for people to sell their homes, real estate experts said.
The GOP proposal preserves the current $500,000 capital-gains exemption, but allows home sellers to claim it only if they’ve lived in the home for five out of the past eight years, an increase from two years out of five. According to the NAR, 26 percent of sellers live in their homes less than five years.
Changes to the mortgage-interest deduction could keep sellers on the sidelines, at least in expensive housing markets. Current law lets buyers deduct as much as $1 million in mortgage interest. The House bill lowers the deduction to the first $500,000 in interest, but preserves the larger figure for owners who bought their homes before the bill was proposed on Nov. 2.
Buyers striking a deal after that date would lose the ability to deduct mortgage interest above $500,000 under the House bill, offering another reason for owners to stay in their current homes. The Senate keeps the $1 million limit.
Lost to Confusion
In areas where home prices have gone up quickly, the new tax treatment could add tens of thousands of dollars in additional taxes for short-tenured sellers, according to Skylar Olsen, an economist at Zillow. In Palo Alto, California, a typical homeowner selling after four years would pay an additional $75,000 in tax on gains from their home sale, according to Olsen’s analysis.
New Jersey real estate broker Nick Boniakowski recently lost a $1.4 million sale on a waterfront condo in Jersey City. He blamed the confusion surrounding taxes.
Boniakowski said the client hit pause just as the House of Representatives unveiled its tax plan. The client didn’t know how much he’d end up paying, or could no longer deduct, and he didn’t want to make the deal without knowing, said Boniakowski, who works for Redfin.
“Everyone wants information and any kind of fear just paralyzes people,” Boniakowski said. “The uncertainty is freaking people out.’’
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Source : https://finance.yahoo.com/news/gop-tax-plan-america-housing-110023628.html