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Real estate market bracing itself for new tax reforms

December 8, 2017
By BOB and GERI QUINN - Homing In , Cape Coral Daily Breeze

There is a lot of concern in real estate circles that some of the proposed changes in the new tax reform bill could have an adverse effect on the real estate market and potentially result in upwards of a 10 percent decline in home values nationwide. So as this tax reform bill heads into conference meetings in an attempt to reconcile the Senate version with the House version, there is no telling what we will ultimately end up with, as the lobbyists, under the cover of darkness, mount their final ascent up Capital Hill.

Before digging deeper into tax reform, we would like to clarify that we are not attempting to provide any specific tax advice, but just a broad, general overview of our understanding of some of the proposed changes in the new tax reform bill. This information is subject to change, once the new tax reform bill is finalized. We would, however, strongly recommend that you consult with your CPA, tax advisor or a real estate or tax attorney for advice about your specific situation, as it relates to the new tax reform bill and your real estate holdings.

The tax code is often used as a means to shape public policy and by adding or removing certain tax deductions or tax credits, the government can incentivize or penalize certain taxpayer behavior. For the longest time, the federal government has encouraged home ownership by offering favorable tax treatment, up to certain limits, on the interest paid by homeowners on mortgage debt, along with deductions for the amount paid for local and state property taxes. These tax benefits helped make homeownership more favorable and affordable for more people, however, all of this could be about to change.

While a lot of the attention with the proposed changes in the tax law and its potentially negative impact on the housing market has been focused on the mortgage interest rate deduction and tighter limits on the deductibility of property taxes, these changes will most likely not have much of a direct impact on an "average" homeowner in Cape Coral. This is due in part to the low interest rates on mortgages and the fact that a vast majority of homes in the Cape sell for around $300,000 or less. These factors have reduced the amount of mortgage interest paid by many homeowners, giving them less to deduct, not to mention that a lot of homebuyers in Cape Coral have paid cash for their homes.

Also, since it appears the standard deduction in the new tax reform bill is probably increasing to $12,000 for single tax filers, and $24,000 for a married, filing joint taxpayer, a larger number of Cape Coral homeowners will probably not qualify for itemized deductions. This means any eligible mortgage interest and property tax deductions will most likely be covered within the higher standard deductions.

That is not to say there will be no impact on our real estate market and at least a portion of our local population, but a lot will depend on where the dust settles on the final tax bill. For instance, if the provision to eliminate the mortgage interest deductibility on a second home, which is in the House version of the bill but not in the Senate version, remains in the final bill, it could have an impact on our market because we attract a lot of people who own two homes. Not being able to take deductions on a second home might prevent some people from buying a second home. At the same time, some of the negative impacts to our market may be offset by people looking to escape from the various, high-tax states up north, so the tax reform bill might actually motivate more people to move to Florida.

One proposed change in the new tax reform bill to keep an eye on involves the capital gains tax on the sale of a primary residence. Here is a simplified overview of the current tax code versus the proposed change. Right now, if you have lived in your home as a primary residence for at least two of the last five years and you sell the home, a single tax filer may qualify to exempt up to $250,000 of capital gains from the sale, and a married couple filing a joint tax return may qualify to exempt up to $500,000 of capital gains from the sale.

Let's consider married Cape Coral homeowners who also still owns their long-time northern home and they decide it is becoming too much for them to maintain two homes. If they maintained their northern home as their primary residence when they sold that home, they qualified for the two out of the last 5 year rule. This would allow them to exempt up to $500,000 of their gains from the sale of the northern home from capital gains taxes. Then they became Florida residents and declared their Cape Coral home as their primary residence. Two years later, they decided their Cape Coral home was too big and too much of a worry when they were traveling on vacations, so they decided to sell it and buy a nice condo. Since they now met the required "two-year rule" when they sold this home, they qualified again to exempt up to another $500,000 of their gains from capital gains taxes. So they were able to sell two homes in less than five years and keep the gains in their pockets, which helped boost our local economy and real estate market.

Under the new tax reform bill, the two-year rule for capital gains will turn into a five-year rule, so a homeowner will now need to own a home as their primary residence for at least five of the last eight years in order to qualify for the capital gains tax exemption. If you have owned your home as your primary residence for the last two years and you are trying to sell it now, or planning to sell it in 2018, and if you will have a gain on the sale, then "say hello to your little friend," because you are about to have a new partner in the form of Washington, D.C., sharing in your gain. There might be a provision in the new tax bill allowing you to fall under the current capital gains tax rules even if the sale of your qualifying home closes in 2018, as long as you have a signed contract on that home dated before midnight, Dec. 31, 2017.

Assuming that this capital gains tax change makes it into the final tax reform bill, and if you are selling a home that has been your primary residence for at least five of the last eight years, you will still likely qualify for the capital gains tax exemptions as outlined above of up to either $250,000 or $500,000.

Usually, when the government makes changes to the structure of the capital gains taxes, it has an impact on market behavior, because most people hate the thought of paying a higher tax now that they could avoid if they wait to take action. So this five-year rule could hurt our market by causing people to wait until they qualify, before selling their primary residence. Our advice is to stay tuned and double check with your tax advisor about your specific situation.

(The information contained in this article was obtained from various outside sources, which are believed to be reliable, but not guaranteed, and it is subject to change without notice. This article is strictly for informational purposes only, and it is strongly recommended that individuals seek the advice of tax and legal professionals regarding their specific situation. The Quinns are a husband and wife real estate team with the RE/MAX Realty Team office in Cape Coral. They have lived in Cape Coral for over 38 years. Geri has been a full-time Realtor since 2005, and Bob, who also holds a Certified Financial Planner designation, joined with Geri as a full-time Realtor in 2014. Their real estate practice is mainly focused on Cape Coral residential property and vacant lots.)



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