After efforts to repeal (or repeal and replace) the Affordable Care Act, often referred to as Obamacare, stalled, attention on Capitol Hill and the White House turned to tax reform.
As a player in the real estate industry, you may be wondering whether tax reform will have an effect on your business. In this case, it certainly depends upon what passes, but also, it depends on whose opinion you follow.
Mortgage Interest Deduction
What could have the biggest impact on the fix-flip business would be any change in the home mortgage interest deduction.
At this point, neither the White House nor Congressional Republicans are talking about eliminating the mortgage interest deduction. The deduction is one of those third-rail issues: It’s wildly popular, easily understood, widely used, and any effort to eliminate it could create an electoral backlash.
Some talk has circulated about lowering the cap on the mortgage interest deduction, which currently stands at $500,000 for individuals or $1 million for couples, but no serious numbers have emerged.
Negating the Deduction
However, provisions in the House tax reform blueprint and President Trump’s proposal could effectively eliminate the mortgage interest deduction for millions of homeowners. The House plan proposes basically doubling the standard deduction (from $12,700 to $24,000 for couples, $6,350 to $12,000 for single filers) while the Trump plan does double it to $25,400 for couples and $12,700 for singles. Either would end the incentive for the vast majority homeowners to itemize their deductions. Both plans also eliminate the tax deductions for local and state taxes, meaning homeowners would no longer be able to deduct property taxes.
Kenneth R. Harney, a real estate reporter for the Washington Post, reports that tax experts say 84 percent of 45 million taxpayers who itemized in 2017 would switch to the standard deduction.
Harney cites an example from Evan Liddiard, the National Association of Realtors’ senior tax policy representative: A Utah couple with one child who hold a $163,000 mortgage with $61,000 in annual income. Under the current tax code, they could deduct $7,160 in mortgage interest, $1,189 in local real estate taxes, $1,304 in mortgage insurance and $2,250 in other state and local taxes. Their tax benefit for home ownership in 2016 would be $1,185. Under the House plan, their tax benefit would be zero, and their 2016 tax liability would be $2,940, up from $2,325 under current policy.
Real estate industry experts say this loss of tax incentive will discourage families from seeking to purchase homes. Other experts believe the effect on home ownership will be negligible, but the change could have a negative effect on housing prices because the tax benefit has factored into home values.
Business Owner Incentive
A proposal in the Trump plan would allow business owners to have their incomes taxed at the corporate rate, which he proposes to drop to 15 percent, rather than personal rates as self-owned businesses must do under the current law.
Business Interest Deduction
Another piece of the equation is that the House plan also calls for the elimination of the interest payment deduction for businesses, which is a staple of the real estate business. Tax experts consider this necessary to make up for the loss of tax revenue as overall tax rates will be compressed and reduced.
This means if you borrow money to purchase and rehab your fix and flip properties, in the future you could lose the ability to deduct the interest on those loans.
According to the New York Times, these interest payment deductions were eliminated in a 1986 tax reform, however, they were reinstated seven years later, thanks in large part to heavy lobbying by the real estate industry.
You can expect the real estate industry to keep a close eye on all tax reform efforts this year, with the understanding the industry likely has a strong advocate in the White House.
The Post’s Harney recommends monitoring tax reform efforts, but be aware that it’s likely to move slowly and any changes could be phased in over a longer period of time. He also notes deep divisions in the House could keep any tax reform efforts from passing, so it’s possible the status quo will remain.
In the meantime, as you go about your business of fixing and flipping houses, contact us about your need for affordable loans. And stay tuned here for updates on tax reform and their possible effects on your real estate investment business.
Washington Post article:https://www.washingtonpost.com/realestate/homeowners-might-be-tempted-to-give-up-popular-tax-deductions/2017/04/04/04a7fb8e-189b-11e7-9887-1a5314b56a08_story.html?utm_term=.efac55a082b3
New York Times article: https://www.nytimes.com/2017/04/22/business/trump-tax-real-estate.html
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