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Will Tax Reform Kill America’s Housing Market?

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Terry Story, Tax Reform

With Terry Story, 29-year veteran Real Estate Agent with Coldwell Banker in Boca Raton, FL

New Tax Proposals Will Impact Real Estate

This week’s Real Estate Round-Up starts with Steve asking Terry about the potential impact on real estate of the new tax reform bills doing the rounds in the Congress and the Senate.

Home Sales Tax Exemption

Regarding the home sales tax exemption, Terry explains that currently, homeowners (who are married and file jointly) are not taxed on up to $500,000 of capital gains ($250,000 if single) on the sale of a home provided the owners used the property as primary residence for at least two of the past five years.  Under the new tax reform proposals, homeowners will have to live in the home for at least five of the past eight years to qualify for the $500,000 home sales capital gains tax exemption.

For example, if you bought a house for $100,000, added upgrades of $50,000, and sold it for, say, $700,000, you make a profit of $550,000, on which you only pay capital gains on $50,000 because the first $500,000 is exempt, provided you meet the residency requirement of two years under current law.

So, it’s important that you also save your receipts, should the IRS come asking.

If these tax reform proposals go through, people will stay in their homes longer if they have substantial capital gains, which could reduce the number of homes for sale and reduce the number of buyers. That said, Terry believes gains of over $500,000 are not all that common for median-priced homes.

Eliminating The Mortgage Interest Deduction

Steve brings up talk of eliminating the mortgage interest and property tax deductions. On the face of it, Terry says, that will make home purchases less attractive and reduce affordability, which has the real estate industry up in arms.  However, Terry’s not too sure about its real impact on consumers because current proposals also include almost doubling the standard deduction to $12,000 for single filers and to $24,000 for joint filers, while getting rid of personal exemptions, mortgage interest, and property tax deductions.

Steve likens this to wishing that your credit card interest was tax deductible and doesn’t believe the mortgage interest deduction is a primary driver in home purchase decisions because of the many other attractions of living in your own home.

Is The Rental Market Softening Or Not Really?

An article in the New York Times stated that rental markets seemed to be softening a little bit because millennials were going out and buying single-family homes.  And yet, Terry claims the opposite—that single-family rentals, which include townhouses, are actually edging out purchases of single-family homes.

Terry explains this as builders focusing on developing townhomes and single-family homes for rent, which millennials find quite attractive, especially if they can’t afford the down-payment needed to purchase a home.  Moreover, she has heard many builders say that they can buy lots and build homes but can’t sell them, and find it easier to rent them out.  As a result, builders are more focused on developing rental properties.

Should A Seller Be Allowed To Stay After The Sale?

Steve questions the advisability of a buyer allowing the seller to remain in the house after the sale closes.  Terry doesn’t like the idea because she’s seen it play out pretty badly in several cases.  In such situations, she recommends having a written agreement over the terms of the stay so the buyer has legal recourse should the seller cause problems down the road.  Instead, she suggests extending the closing period to give the seller time to move out and to avoid a potential eviction process.  Even though you, as a buyer, want to be accommodating, you must think of protecting your own assets and should consult an attorney before agreeing to such requests.


Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital.  Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions.  Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances.  The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.

Read The Entire Transcript Here

Steve Pomeranz: It’s time for our Real Estate Roundup. This is the time every single week we get together with noted real estate agent, Terry Story. Terry’s a 29-year veteran with Coldwell Banker located in Boca Raton, Florida. Welcome back to the show, Terry.

Terry Story: Thanks for having me, Steve.

Steve Pomeranz: We are kind of in the mode of Congress trying to figure out a new tax bill, and it has some implications for real estate. Name one for me.

Terry Story: Well, first, you know, the current capital gains is up to 500, which is a home sales tax exemption. As long as the seller owns a home and resides in the property for two of the five years, but Congress wants to change that to five out of eight years, so what does that mean? It means you’re going to have to stay in your house longer if you’re in a capital gains situation. Again, that means you have to have gains of over 500,000. Typically, Steve, you’re not going to see that in your average home, unless the market really accelerated and appreciated. That’s not a house value of 500,000, that means you actually profited by 500,000.

Steve Pomeranz: Yeah, so you bought it for 100, and it’s now worth 600, that 500,000-dollar difference is exempt from tax.

Terry Story: Right. And then you have to factor in, let’s say you put in new kitchens and baths, that’s all-

Steve Pomeranz: Oh, sure. That increases your cost.

Terry Story: Yes, exactly.

Steve Pomeranz: If you put in 50,000 dollars and you paid 100, you put in 50 to fix your kitchen, now your cost base is 150, so now the tax-

Terry Story: So, save your receipts.

Steve Pomeranz: Save your receipts, right. So this is really only for those who have appreciation greater than 500,000?

Terry Story: Right. That’s one of the changes. So, I think it might be … I don’t know if it’s really going to hurt that many people. You know, they’re saying that half the sellers are between 19 and 34, they’re the ones who tend to move quicker, because it’s their first home, their incomes are growing, they’re more apt to make a move up and if you take away a tax incentive, they’re thinking that maybe they’ll stay longer in their houses and then it slows down new people trying to enter into the marketplace from being able to buy.

Steve Pomeranz: Yeah, but still, I mean, the first 500,000 is tax exempt. How many people are really going to experience growth in two years of their home, greater than 500,000 dollars?

Terry Story: Right.

Steve Pomeranz: It’s a very small amount. You know, talking about taxes, let’s talk about this idea about eliminating the interest deduction that you get from your mortgage.

Terry Story: Right.

Steve Pomeranz: What is your industry saying about that? I’m sure they’re not happy about that.

Terry Story: Well, the industry is jumping up and down saying, “no, you can’t touch, that’s going to hurt our industry.” Obviously, I’m going to fight on the side of the realtors and say, “yes, that’s not a good thing.” But at the same time, I’m not well-versed enough and knowing all the ins and outs of this, because, for example, they’re saying they’re going to take away the mortgage deductions, but then they’re going to increase standard deductions like the marriage, I don’t know what it’s at now, but raise that to like 24,000, so I don’t know how many people are going to be affected or not be affected. This is the way that I look at it. It’s an incentive. It’s a benefit, but at the end of the day, people need roofs over their houses. Whether they rent a house or they purchase a house or drive their house around.

Steve Pomeranz: Yeah, you need a roof over your head.

Terry Story: You need a roof over your head.

Steve Pomeranz: The taxes are like a nice bonus. Think of it this way too. So, let’s say you have credit card debt. You know, sometimes at the end of the year when you’re doing your taxes you say, “Oh, I wish this credit card interest was tax deductible.” But it’s not. The only thing that’s tax deductible is your mortgage interest, but yet you’re still going to have credit card debt because you’re using it. You got other things in mind for the use of that card and it’s the same thing with a house. You’re still going to have to buy a house and, yeah, it would be nice to get the mortgage deduction, but I really agree with you. I don’t really think that’s the primary driver when it comes to buying a house.

Terry Story: Right.

Steve Pomeranz: Yeah. We shall see. Neither of us are experts in this area.

Terry Story: No, so I’m going to fight that the deduction stays, but whether or not it does, I don’t know.

Steve Pomeranz: All right. So, you know, a few weeks ago there was an article in the New York Times which discussed the fact that rental markets seemed to be softening a little bit because millennials were going out and buying single-family homes, and yet you’ve presented me with some information that says that single-family rentals, which then includes townhouses, are actually edging out the purchase of single-family homes. Take us there.

Terry Story: Apparently, the builders are building a lot of the rental townhomes, single-family homes, and there’s an attraction, especially by the millennials, for these types of properties. And basically, the bottom line is, is they can’t afford quite yet to purchase a home. So, you know, on the flip side from a builder’s point of view, I’ve got to believe the reason why they’re doing it is, it’s more profitable somehow. You know, not being a builder, I don’t know what the costs are, building a rental complex versus or even rent a single-family home, versus a home that they sell. Apparently, that seems to be the trend and the one person-

Steve Pomeranz: The trend is probably created to some degree by the fact that there’s a lot of millennials that don’t have enough money for a down payment to buy homes, so they rent them.

Terry Story: Right, obviously, there’s a demand for it. So, one person wrote or said, “I can buy lots in areas, that I can’t sell homes, but I can rent.”

Steve Pomeranz: Yeah, so, they can buy the lot, but the builder’s saying, “I can’t build a home to sell it, but I can build a home to rent it.”

Terry Story: Right.

Steve Pomeranz: And I think that speaks total volumes.

So, I want to switch gears here a little bit. I want to ask a question about something we were talking about off air and here’s the question. Should a buyer allow the seller to stay in the house after closing?

Terry Story: You know, we hate to do it and sometimes it’s a necessary evil and there’s two theories on it. If you’re going to do it, I say you have something in writing. In the particular case that I just experienced, the buyers said, “You know what? I don’t want anything in writing because if he’s not out in 48 hours like he says he’s going to be, then I’m calling the police for trespassing. I am the rightful owner of the property and I have nothing in writing giving him permission to remain there.” Where I say, if it’s in writing, then you have some legal recourse, but in reality, then you have to evict him and then you go through a whole process of eviction. Just try as best you can to avoid the situation. Extend the closing if you have to. It can be a bad experience. I’ve seen all kinds of things occur.

Steve Pomeranz: You’re trying to be a nice person.

Terry Story: You try to be a person. It’s a very-

Steve Pomeranz: But it could backfire on you.

Terry Story: … Yeah, it’s a very awkward situation when you’re presented with it and you want to be the nice person, do the right thing, but you have to protect yourself. So, think it out thoroughly. Consult an attorney before you make that decision. Just know what the potential downfall is to it.

Steve Pomeranz: Yeah, think about what you might be getting yourself into.

Terry Story: Like liability.

Steve Pomeranz: Yeah, my guest, as always, is Terry Story. She’s a 29-year veteran with Coldwell Banker located in Boca Raton, Florida and she can be found at Terrystory.com and she can be heard at Stevepomeranz.com as well. Thanks, Terry.

Terry Story: Thanks for having me, Steve.