With the recent passing of a new U.S. tax bill, I thought it was a great time to rely on the insight and expertise of my buddy Steve Harney, Founder of Keeping Current Matters.
On this #TomFerryShow, Steve joins me to discuss how tax reform will impact the real estate industry at large as well as what it means for your role. Here in the blog, I’m going to break down my top 10 takeaways from our conversation.
But first, a quick disclaimer: This blog is not intended to provide personal tax advice, but rather to discuss how new tax code could potentially impact buyers and sellers in your marketplace — and how it affects your role as a real estate guide. For personal tax tips, be sure to consult your CPA.
Tax Reform Takeaway No. 1: Weed Through Media Confusion
Much of what’s been reported about the tax bill is based on ideas that were proposed prior to the bill’s passage rather than what’s in the actual bill. Be careful you’re not talking about what could have been instead of what is the reality.
Tax Reform Takeaway No. 2: Clear the Confusion ASAP
For consumers, confusion leads to fear, and fear leads to paralysis. So unless you want your clients to sit on their hands, that means your role is to clear the confusion as soon as possible. Remove the fears buyers and sellers have based on media reports, and explain how the bill will actually impact them individually. The sooner and more effectively you do this, the less disruption your business will experience.
Tax Reform Takeaway No. 3: Mortgage Interest Deduction
The mortgage interest deduction was reduced from a limit of $1 million to $750,000. It does not affect current mortgages, which will be grandfathered in with the $1 million limit.
The biggest impact of this change will be felt on buyers looking in the $900,000-$1.25 million range who might prefer to keep their mortgage to no more than the $750,000 allowable deduction. Steve was unsure exactly how much even those people will be affected. If people really want to buy in that price range, will paying a little more (due to being unable to deduct as much mortgage interest) stop them? We’ll find out.
Tax Reform Takeaway No. 4: Don’t Let Your Clients Operate from Fear
Those buyers who operated from a place of fear will continue to do so. Buyers who operate from a place of optimism will continue to do so. Steve believes the only real impact will be on fearful buyers who decide to sit out or buy something cheaper to avoid the lower mortgage interest deduction.
Tax Reform Takeaway No. 5: SALT’s Geographic Impact
Steve foresees the elimination of the state and local tax (SALT) deduction differently depending on where you live. A full 70 percent of people don’t itemize their taxes in the first place, so it has no bearing on them. With a larger standard deduction, that 70 percent is expected to increase even higher.
However, the changes will impact those in high-earning states such as California, New York and Florida. People who earn between $200,000 – $500,000 annually will definitely have some decisions to make.
Steve stays the upside is that these markets are those that are most in demand, so even if the elimination of SALT deductions causes an exodus to more tax-friendly states, that inventory will be gobbled up by the huge demand anyway. It wouldn’t be so bad if places like San Francisco and New York freed up some inventory, would it?