Some good news and some bad, depending on the size of your business
President Trump’s nine-page tax reform proposal includes some features that might both help and hurt real estate.
A statement from C.A.R. President Geoff McIntosh says:
“The tax reform proposed by the Republican leadership will eliminate the incentive for people to buy homes, shrink the middle class, and raise taxes on hundreds of thousands of California homeowners.
“The doubling of the standard deduction, coupled with the elimination of state and local tax deductions, such as property taxes, will adversely impact California and its housing market. The average California home buyer could end up paying $3,000 more a year in taxes under today’s proposal.
“Any change that would make homebuying less attractive will be detrimental to the housing industry and the nation’s economy because of the 2.5 million private-sector jobs created by the industry in an average year.”
Outline of the Tax Plan:
A bottom individual tax rate of 12%. This a bump from the current rate of 10% but people currently in the 15% marginal tax bracket would go in here and so in effect see a tax cut. Plus, the standard deduction would increase to $12,000 for individuals and $24,000 for married couples. This would ease the blow for those paying 10%today.
- A middle tax bracket of 25%. But there is no definition of what the middle is.
- The top individual tax rate is 35%. The current top rate is 39.6%.
The plan also references a fourth, higher bracket. No percentage is attached to this proposal, but it seems to be Trump’s way of handling his campaign promise of not lowering taxes for the rich.
While the plan eliminates most itemized deductions, it protects the mortgage interest deduction and charitable write-offs. NAR is quietly cheering.
But the plan wipes out state and local tax deductions, which could hurt high-cost areas like New York and California, and would put an end to homeowners deducting their property taxes.
The plan wipes out the death tax, and offers good and bad news for small business, which will affect brokers and agents. For example, a 25% rate is proposed for pass-through businesses, which means that instead of getting taxed as an individual for business profits, companies will be taxed at this new rate, which should be lower for many businesses.
But the plan also calls for the elimination of some business deductions, it does not specify which ones. The plan is silent on real estate depreciation.
Finally, overseas assets from US-owned companies would be considered repatriated and taxed at a one-time lower rate, expected to be 10% versus as high as 39.5% today. Apple, Microsoft and Google alone are hoarding nearly $500 billion overseas. Some of this money might find its way into the luxury housing market.
Earlier this year, NAR dumped on the three bracket plan and concluded it would hurt homeowners, even with the protection of the mortgage interest deduction.
According to an Inman report, NAR and big-four accounting firm PwC analyzed:
“An illustrative comprehensive tax reform option that would lower and consolidate marginal tax rates to three rates with a top rate of 33 percent, double the standard deduction, eliminate all itemized deductions other than charitable contributions and mortgage interest, eliminate personal exemptions, eliminate the Alternative Minimum Tax, and cap the tax rate on pass-through business income at 25 percent.”
All of these changes were proposed in the “Better Way” blueprint and can also be found in Trump’s tax reform proposal.
The President’s promise:
“Too many in our country are shut out of the dynamism of the US economy, which has led to the justifiable feeling that the system is rigged against hard working Americans. With significant and meaningful tax reform and relief, we will create a fairer system that levels the playing field and extends economic opportunities to American workers, small businesses, and middle-income families.”
Watch for future updates in CVAR At A Glance.