On Jan 27th, we held a bonus seminar on the effect of the New Tax Laws on the real estate market. Mr. Brian Chong, CPA also came to address the most concerned questions from the audience about tax impact on tax payors and real estate investors.
We ran through the different tax brackets and standard deductions
We discussed the effects of the some of the provisions that might affect the real estate market:
Lowering Mortgage Interest Deduction cap and limiting property tax cap will raise the effective cost of owning a home for many new homeowners in high cost states such as the Bay area and in the high price market segments. (In the Bay area property above $1M account for 35% of total sales.) It may slow down tenants turning into home buyers. And may keep the rental market higher up for longer time.
The doubling of standard deduction may shift home owners to use standard deduction instead of the MID for filing. On the other hand, the MID is grandfathered in for loans taken before Dec 14, 2017. Current owners may not want to incur more taxes with purchase of new homes thus escalating the shortage of housing supply. The end effect of these consideration to the price of homes will remain to be seen.
Real Estate investors are not affected much by the new tax laws.
Common concurrences were that:
Investors typically would purchase lower-priced properties, and compete with first-time buyers in the same price segment. As such, many of them may not feel the effect that the new tax reform exerts on home prices.
As the tax reform yield more benefits to renters in general, many of them may decide to rent longer than they would have otherwise. This will drive up demand in the rental market and increase sales of rental properties.
Unlike owner-occupants, investors can write off all the expenses of owning and running a rental under the tax reform. As such, there could be an increase in investors as a result of the tax reform.’
The latest tax reform will have some adverse effects on the housing market, and the degree of impact varies by price level and by location.
In general, the Tax Cuts and Jobs Act will reduce the overall price growth by 1 percent. As such, the statewide median price growth in 2018 is lowered from 4.2 percent to 3.2 percent.
The statewide housing supply will be affected by the tax reform as homeowners delay trading up/down to their next home.
The economy will be growing slightly faster in 2018 because of the new tax, yet rates could also be rising at a quicker pace.