GOP TAX BILL- PANDORA’S BOX OR SANTA’S BOX FOR REAL ESTATE MARKET

Life stands on pillar of 3 ingredients: Food, Cloth and Shelter, which are controlled by the government in power, to some extent.

An economy moves forward with a basic principle: More demand and lesser supply paves way for increased cost. Similarly, high supply and lesser demand leads to decrease in cost.

U.S residential real estate market saw a steep increase in price of homes in 2017 because of its high demand. 2018 has knocked the door with GOP tax bill in hand and it will be interesting to witness what it has brought along with it for U.S Housing Market.

A Dish became insipid by limiting SALT

A deduction limit on State and local taxes has been set to an aggregate of $10,000. Setting a deduction limit has adversely hit the folks living in high-tax states, like California, New York, New Jersey, Maryland, Massachusetts and Illinois. Limit includes state income and property taxes. This amendment is explained in below example:

If your state property tax is $10000 and your state income tax is $14000, total state and local taxes comes out to be $24000, but after setting up the limit, you will only get a maximum deduction of $10000.

How this change in SALT will affect people? People will leave high-tax states in search of places where they can get a home for lesser money. A survey was conducted on 900 home buyers in November which revealed that if SALT deductions are eliminated then a third of home buyers will consider moving to another state.

SALT CHART

Stay longer to taste the honey of incentives

A major change in tax deductions for home sellers has been witnessed in the passed bill. Taking into consideration the current law, under the IRC Section 121, on the sale of a primary residence, a single homeowner was allowed to exclude $250,000 of capital gains as long as they have lived in home for two out of the previous five years. Couples had privilege to exclude up to $500,000 from selling a home.

After the change in rule, now the person must live in their primary residence for the past five of the eight years in order to claim the gain exclusion.

The most annoying part of this change is the non-allowance of any transition period, which means any sale after 01/01/2018 must fulfill the requirement of five-of-eight-years.

The change that became the part of GOP Tax bill will motivate some homeowners to stay in their homes for longer time in order to gain the benefits of exclusion.

Mortgage interest deductions at peak

Taxpayers were allowed to deduct any interest they pay on up to $1 million worth of mortgage loans under the current bill rules. But now a change has been made in the bill by capping the worth of mortgage loans at $750,000.

However, this limit is applied to primary residence and a second home and is not subjected to rental properties.

The Federal Reserve has begun to reduce the size of its $4.5 trillion asset portfolio which has $1.7 trillion share of mortgage securities. The mortgage portfolio reduction will let mortgage rates to slowly increase and in 2018, it is expected that the mortgage rate will slide up to between 4.3 and 4.5%. When higher home prices will meet the higher interest rates it will lead to higher mortgage payments for the same home in 2018.

The U.S economy is in driving seat and is crossing all the hurdles in efficient manner, thereby growing strongly. The strong U.S economy will create a snowball effect, opening door for more and more employment leading to more growth in wages. This domino effect will be the biggest element of housing market of U.S in 2018 which will lead to an increase in demand of homes.

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