REALTORS® have the challenging job of explaining why the GOP’s tax reform proposal isn’t good for homeowners, even though on the surface, the bill appears to offer some benefits for middle-class households. In reality, the changes will lead to higher taxes for most homeowners and lower property values for everyone.
“It’s a difficult argument to make,” Iona Harrison, chair of NAR’s federal taxation committee, said during a federal legislative forum at the 2017 REALTORS® Conference & Expo in Chicago on Friday. “But NAR has been on the front of this debate for two years now, trying to educate members of Congress. It’s taken a lot of courage to do that.”
The bill, called the “Tax Cuts and Jobs Act,” would lower some tax rates while nearly doubling the standard deduction and increasing some tax exemptions for families. These appear to be positive changes—but a look into the details makes it clear that they’re less generous than they seem.
That’s because the standard deduction—which would be increased to $12,000 for single filers and $24,000 for married couples—would be paid for in part by the elimination of the personal exemption and exemptions for dependents. When factoring in these losses, the higher standard deduction only amounts to an increase of about 25 percent for many households, NAR Senior Legislative Policy Representative Evan Liddiard said at the forum.
The alternative is for families to itemize their deductions, but the bill eliminates most of those. Only the deduction for charitable contributions remains completely intact; all the others are either eliminated or curtailed. The mortgage interest deduction is one that’s been retained, but the benefit would be cut in half to $500,000 for new mortgages and eliminated outright for second mortgages and home equity lines of credit. NAR Chief Lobbyist Jerry Giovaniello said the $500,000 cap would hit homeowners in high-cost sates the hardest but would also pinch those in lower-cost states in the years ahead because of inflation.
The deduction for property taxes would also be retained, but it would be capped at $10,000—far lower than the tax bills of many households in higher-tax states. All of the other itemized deductions, including the one for state and local income taxes, would be eliminated. These changes combined will drive many homeowners to take the standard deduction and end up paying hundreds of dollars more in taxes than they do today, NAR estimates.
A bombshell awaits home sellers as well. The capital gains exclusion on the sale of a principle residence, which today is capped at $250,000 for single filers and $500,000 for married couples, would be made much harder to use. Homeowners would have to live in their house for at least five of the last eight years, up from two in the last five, to take the exclusion. And the amount they could take would decrease when household income reaches above a certain threshold.
As a result of all these changes, home values could plummet more than 10 percent, NAR estimates. That will harm all homeowners, regardless of whether they’re affected personally by the tax changes. “It comes down to whether we want to be a nation of homeowners or non-homeowners,” Giovaniello said. “We’ve given Congress tons of information on this.”
NAR has issued a Call for Action, asking members to warn their congressional representatives about the dangers of the tax plan.