The announcement of the Tax Cuts and Jobs Act has sent ripples through the real estate industry with its plan to cut the mortgage interest deduction in half. The bill, H.R. 1, reduces the limit for claiming the deduction from $1 million to $500,000. The National Association of Realtors issued a statement expressing concerns. “Eliminating or nullifying the tax incentives for homeownership puts home values and middle-class homeowners at risk, and from a cursory examination this legislation appears to do just that,” NAR President William Brown said.
Home buyers purchasing a primary residence who were in a contract before November 2 and are scheduled to close before January 1, 2018, will be exempt from the new rule. The new tax plan also changes the rules with regard to how sellers can deduct the profits from the sale of their primary residence from their taxes. Previously they needed to live in the house for two out of every five years and could deduct the gains once every two years. Now sellers must live in the home for five out of the past eight years and can only collect on the benefit once every five years. This would not apply to taxpayers with income over $250,000.
The National Association of Home Builders also spoke out against the tax plan. Association CEO Jerry Howard said that the new legislation could potentially cause recessions in some of the biggest housing markets. Howard estimated that the changes could impact seven million homes in California where prices are often higher than many other areas.
As Housing Wire reported, the tax plan could also impact the future of Fannie Mae and Freddie Mac. The reduction of the corporate tax rate could prompt the two government-sponsored enterprises to seek another government bailout if they are unable to meet their obligations.
The news came as the real estate industry began to gather for the National Association of Realtors conference in Chicago. While only around five percent of mortgages are over $500,000, the bulk of those are in the Northeast and California. These are also markets where housing supply is strained and there is a concern that many owners might choose to stay in their homes rather than face an increase in their tax bills.