How does the final tax reform bill affect real estate?
One of the big concerns people had while the bill was being written was that you could no longer do a 1031 exchange on an investment property. A 1031 exchange allows you to sell a non-owner occupied investment property and roll all the proceeds into another investment property without paying any taxes. They did make some changes to the 1031 exchange, but those changes don’t affect real estate, so that is good news.
They were also talking about reducing the deductible amount of interest on the size of your loan from $1 million to $500,000. Ultimately, they agreed on a $750,000 cap. From December 15, 2017 onward, if you take out a loan for over $750,000, only the interest on the first $750,000 will be deductible.
If you have a $1 million loan right now, that has been grandfathered in. You will get the full deduction, even if you refinance the loan. That will have an impact on the upper end of the market, as will some of the deductions we lose for state taxes.
The home equity line of credit has lost its deductible interest. If you have a home equity line of credit and you’re paying interest on that, check with your accountant, but I’m pretty sure that is no longer a deductible item.
In general, these changes won’t have a huge impact on our local real estate market, although it will have a bigger impact here in California than in areas like Arizona or Kentucky, where housing is cheaper.
Going forward, there is a possibility of interest rates increasing from around 4% to as high as 5%. Prices will increase a little bit, and the market continues to be strong. There’s not as much concern about a bubble.
If you plan on selling your house in this market, keep in mind that price is still important. Just because there’s no competition and your house is the only one on the market doesn’t mean you can overprice your home. Buyers will wait for another house to come along that has been priced fairly.
All in all, the tax plan won’t have too big of an impact on our market, and 2018 looks like another strong year for real estate.
If you have any other questions about our real estate market, just give me a call or send me an email. I would be happy to help you!