As you probably have heard by now, the Tax Reform bill has passed and is awaiting President Trump's signature which most likely will happen before the end of the year. So, what effect will this have on the Boston real estate market?
The National Association of Realtors has put together a fantastic article summarizing the impact the bill will have specifically on current and prospective homeowners as well as those of us who practice real estate as a business or as investors. I've included a link to the article at the bottom of this post and highlighted some of the essential points below.
Exclusion of Gain on the Sale of a Principal Residence
- The original version of the bill proposed that the time a homeowner must live in their primary residence to avoid taxes on any gains up to $250,000/$500,000 be increased from 2 out of the past five years to 5 out of the past eight years.
- The final version of the bill retains the current two out of the past five years stipulation. This revision was a huge victory for all homeowners.
My Thoughts: If this passed it would have created an even lower inventory environment than our current market. Sellers who would have considered selling because of the appreciation they had achieved over the past couple of years would likely not to unless they had to.
Mortgage Interest Deduction
- The original version of the bill proposed a reduction of the limit on deductible mortgage debt from $1 million to $500,000 and eliminated the deduction for second homes.
- The final version of the bill reduced the limit from $1 million to $750,000 and kept the deduction on second homes.
My Thoughts: While most of the country wouldn't have felt the impact of this change, it was one of the scariest proposals for high price locations like Boston. The effect of the proposed reduction from $1m to $500k would have been significant for buyers who were relying on that deduction when calculating what they can afford. Luckily, the National Association of Realtors were able to persuade Congress to compromise and only reduce it to $750,000. That shouldn't be significant enough to disrupt the Boston real estate market at all.
Deduction of Property, State Income, and Sales Tax
- The original version of the bill proposed the elimination of the deduction of all state and local income taxes and a cap of $10,000 for the deduction of property taxes.
- The final version of the bill allows an itemized deduction of up to $10,000 for the total of all state income, property, and sales taxes.
My Thoughts: This one stings. States like Massachusetts, which have both high property values (thus high property taxes) and a state income tax, just got more expensive to call home. High-income earners, which typically make up the majority of homeowners of Boston real estate, will be hurt the most by this change.
NAR is now projecting slower growth in home prices, between 1-3%, than if the bill hadn't passed. Impacts will likely be more significant for high-cost locations which already have a high inventory of available homes. Luckily for Bostonians, our inventory levels are still incredibly low (between 1-3 months supply in most neighborhoods) which should insulate us from any significant declines.
I'm also curious to see if the non-real estate specific proposed changes to the tax code can outweigh the negatives and benefit people enough to keep the real estate market humming. With all of that said, my prediction for 2018 is that it will be another strong year for Boston real estate but with less bidding wars and a trend towards a more balanced market which, in my opinion, isn't the worst thing that could happen!
What do you think? Feel free to leave your comments below!