As of the time of this writing, there is one large elephant in the room with regard to people’s level of optimism regarding property, and that is the potential of a major tax overhaul.
For the last 30+ years, our tax law has been geared toward incentivizing people toward home ownership, and even second home ownership, through the deductibility of interest and property taxes.
Since the last major tax overhaul in 1986, there have been tweaks to the tax code with regard to property. In the late 90s, homeowners were incentivized to move every few years, as the sale of one’s property became capital gains exempt up to a $250,000 gain for those filing individually, or a $500,000 gain for those filing jointly, provided that the person or couple had lived in the home for at least two of the previous five years. Previously, there was a one time capital gains exemption available to folks over 55 only, and it was a once-in-a-lifetime deduction. More recently, Congress also temporarily gave homeowners the added ability to deduct the cost of mortgage insurance, in addition to the interest itself, from the taxes of those purchasing with less than 20% down.
Proposals made in both the Senate version as well as in the House of Representatives’ version of the tax overhaul that is being championed by the President will limit or curtail the number and dollar amount of deductions available to property owners with regard to both interest and local taxes.
Depending on whether it is the Senate version or the House version, or some combination of the two, that ultimately gets passed, homeowners and second homeowners will be the big losers unless they have never chosen to file a Schedule C return. The deductibility of interest could decrease to interest charged on the first $500,000 of a mortgage, instead of the current $1 million ceiling. Property taxes, which are now fully deductible from federal income taxes, may no longer be deductible, particularly affecting northeast and west coast property owners. One may lose the ability to deduct the interest from owning a second home as well. In addition, the capital gains exemption may require owner occupancy in five of the previous eight years of a property instead of the current two out of the last five years. That will make it less appealing to move every few years, and will actually bring the ability to enjoy this exemption to be enjoyed only by those choosing to live in a home for longer than the national average of 7.1 years of home occupancy per person.
The National Association of Realtors, one of the most powerful lobbying groups in Washington, is putting a no-holds-barred effort into opposing these changes to the tax code as it relates to home ownership. Until the end of the year, or at least until Congress goes into recess, all but those who must buy or sell over the next four weeks may put off a decision until it is actually known how the tax proposals before Congress are adjudicated. Fortunately, it does seem that those who are current mortgage holders, or those who will become a current mortgage holder by the end of this year, will still enjoy the incentive of full interest deductibility up to a $1 million mortgage, as both the Senate and House proposals seem to grandfather in those who have planned their financial future around the ability to deduct the interest payments on their home. Any tax change proposed would have the potential to affect sales that take place after the start of the new year.