Release of final tax bill details

[Katsmeow]

Another question. Anyone have any idea how quickly (if) home prices may decrease as a result of the fact so many fewer people will be able to itemize making the deduction for mortgage interest worthless for most people. (The limitation on SALT may also play a part).

That is the bill does retain mortgage interest deductions (up to mortages of I think $750k). We plan to sell our existing house and buy a house in 2018. My understanding is that in general home prices have been propped up (so to speak) by the existence of the mortgage interest (and to some extent property tax) deductions.

The deductions still exist. But, many people won't take them any more due to the increased standard deduction. Given that -- how quickly do you think house values will go down (if at all) because of the perception they are less valuable if you can't deduct interest?

Specifically I am wondering if the reduction in home sale prices will accelerate over the course of the year -- in which case it makes sense to sell ASAP.

On the other hand, it is possible that there might be an immediate decline as people panic but that the prices then rebound a bit as people realize that deductible of mortgage interest isn't that big a deal. If that is the case, then maybe it makes sense to wait a few months before listing.

 

[Senator]

Another question. Anyone have any idea how quickly (if) home prices may decrease as a result of the fact so many fewer people will be able to itemize making the deduction for mortgage interest worthless for most people. (The limitation on SALT may also play a part).

That is the bill does retain mortgage interest deductions (up to mortages of I think $750k). We plan to sell our existing house and buy a house in 2018. My understanding is that in general home prices have been propped up (so to speak) by the existence of the mortgage interest (and to some extent property tax) deductions.

The deductions still exist. But, many people won't take them any more due to the increased standard deduction. Given that -- how quickly do you think house values will go down (if at all) because of the perception they are less valuable if you can't deduct interest?

Specifically I am wondering if the reduction in home sale prices will accelerate over the course of the year -- in which case it makes sense to sell ASAP.

On the other hand, it is possible that there might be an immediate decline as people panic but that the prices then rebound a bit as people realize that deductible of mortgage interest isn't that big a deal. If that is the case, then maybe it makes sense to wait a few months before listing.

Very few homes will have a mortgage larger than $500K or $750K. And $10K in property taxes are not the norm. I do not think you will see any decrease in the majority of homes.

If anything, it will limit new supply of homes and existing homes will increase in value.

 

[Helena]

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House passed the tax bill today. Then the Senate noticed a violation that had to be removed. So the Senate will vote on the tax bill tonight and send it back to the House again tomorrow for another vote.

House to revote on Trump, Republican tax reform bill due to Senate Byrd rule - Business Insider

 

[CRLLS]

Very few homes will have a mortgage larger than $500K or $750K. And $10K in property taxes are not the norm. I do not think you will see any decrease in the majority of homes.

If anything, it will limit new supply of homes and existing homes will increase in value.

I know $10K in property taxes are high for the average of USA homes, but some states rely disproportionately on real estate taxes for funding local government. In the collar counties around Chicago, it doesn't take much to exceed $10K.

We are considering moving. We need to be cognizant of the taxes as much, if not more, than the purchase price.

 

[Walt34]

...In the collar counties around Chicago, it doesn't take much to exceed $10K.

We are considering moving. We need to be cognizant of the taxes as much, if not more, than the purchase price.

I can see why with taxes like that. In 20 years I suppose you could spend as much, if not more, than the price of the house on taxes. Yikes!

 

[Katsmeow]

Very few homes will have a mortgage larger than $500K or $750K. And $10K in property taxes are not the norm. I do not think you will see any decrease in the majority of homes.

If anything, it will limit new supply of homes and existing homes will increase in value.

Oh, I agree about most people not having a large mortgage and not having $10k in property taxes (although that $10k limitation is for ALL state and local taxes not just property taxes). That isn't the point.

The point is the fewer people with $300k or $400k mortgages will be itemizing because the threshold to itemized will be much higher than under current law. Most people with $300k or $400k mortgages will get zero benefit from the deduction simply because they will be taking the standard deduction. I am wondering if because of that home prices may decline.

 

[SecondCor521]

The point is the fewer people with $300k or $400k mortgages will be itemizing because the threshold to itemized will be much higher than under current law. Most people with $300k or $400k mortgages will get zero benefit from the deduction simply because they will be taking the standard deduction. I am wondering if because of that home prices may decline.

I would expect home prices overall to decline, because mortgages just effectively got more expensive, and most home buyers rely on a mortgage for the majority of the purchase price.

I also would expect higher end home prices to decline more with the $1M -> $750K limit reduction.

When will this happen? It really depends on how quickly home buyers understand the impact on affordability. I would expect some, maybe many, people will buy without understanding the impact and the find out at tax time that they made a mistake. But those with good honest realtors should be notified in the buying process.

On the other hand, sellers may not care that buyers have less affordable mortgages. So they may still ask what they're asking and refuse (or be unable to) drop their asking prices or accept lower bids.

So my guess is you could see an impact as soon as January, but I think what you might see first is just a slowdown in sales before prices actually drop. But I'm terrible at guessing the future.

 

[Curmudgeon]

I have a question as to what the bill provides. My understanding is that the new brackets will expire in 2025 (or 2026 - not sure). Then the brackets and tax rates for each bracket go back to where they are now.

What about the increase of the standard deduction and getting rid of the exemptions? I assume that does not expire. Is that correct?

Pretty much everything that applies to individual taxes - including the std deduction change and exemption change - expires after tax year 2025. In 2026 we go back to the 'old way'.

 

[braumeister]

In 2026 we [-]go back to the 'old way'[/-] have no idea what will happen.

FIFY

 

[GrayHare]

IMO the leverage provided by a low-interest mortgage outweighs the value of the mortgage tax deduction, so inability to deduct will not depress housing prices.

 

[spncity]

https://www.kitces.com/blog/final-g...ividual-tax-brackets-pass-through-strategies/

A paragraph from this article (the bold is mine):

In addition, to prevent households from attempting to maximize their state and local tax deductions in 2017 (before the cap takes effect in 2018), the new rules explicitly stipulate that any 2018 state income taxes paid by the end of 2017 are not deductible in 2017 (and instead will be treated as having been paid at the end of 2018). However, this restriction applies only to the prepayment of income taxes (not to property taxes), and applies only to actual 2018 tax liabilities, which means it is still permissible to pay 4th quarter 2017 estimated taxes by the end of 2017 (and not in early January of 2018) to obtain the 2017 deduction.

Appreciate comments. Sorry for repetitive questions. My head is swimming.

So I can pay property taxes ahead? And can pay estimated state income tax in December for the purposes of itemizing?

 

[cathy63]

So I can pay property taxes ahead? And can pay estimated state income tax in December for the purposes of itemizing?

Yes, you can pay your property taxes ahead if your state/county can accept them and you know how much to pay. That amount is deductible on your 2017 Schedule A if you itemize.

Yes, you can send in an estimated payment to your state in December for your 2017 state income taxes, and that amount is deductible on your 2017 Schedule A if you itemize.

 

[Senator]

Yes, you can pay your property taxes ahead if your state/county can accept them and you know how much to pay. That amount is deductible on your 2017 Schedule A if you itemize.

Yes, you can send in an estimated payment to your state in December for your 2017 state income taxes, and that amount is deductible on your 2017 Schedule A if you itemize.

Even if you pay ahead, it will only help for one year.

 

[spncity]

Yes, you can pay your property taxes ahead if your state/county can accept them and you know how much to pay. That amount is deductible on your 2017 Schedule A if you itemize.

Yes, you can send in an estimated payment to your state in December for your 2017 state income taxes, and that amount is deductible on your 2017 Schedule A if you itemize.

Thank you for comments. So, if I guesstimate, but overshoot a little, does the state tax refund turn into income in 2018?

 

[Yarnstormer]

As a single parent head of household - I assume that I will no longer be itemizing. Does that mean that any sole proprietor deductions for my home based business go away as well? I was going to save a few purchases for 2018 but now I might go ahead and spend the money. Kind of regretting choosing an HSA plan with no copays now. That would not be deductible if I took the standard deduction would it?

 

[RunningBum]

Thank you for comments. So, if I guesstimate, but overshoot a little, does the state tax refund turn into income in 2018?

Yes it does. Line 10 of form 1040. I'm trying to get as close as possible, to maximize the deduction for 2017 without adding more income for 2018 which impacts my ACA subsidy.

 

[Senator]

As a single parent head of household - I assume that I will no longer be itemizing. Does that mean that any sole proprietor deductions for my home based business go away as well? I was going to save a few purchases for 2018 but now I might go ahead and spend the money. Kind of regretting choosing an HSA plan with no copays now. That would not be deductible if I took the standard deduction would it?

Business deductions will always be deductible against business income.

 

[ER604me]

Question about small business pass through provisions

I have a small consulting engineering company that is an S corp and LLC. We have been able to claim a section 199 deduction in the past but the new tax bill eliminates that deduction. Unfortunately I will get hit with a $6,000.00 tax increase due to this elimination. We also see that that their are other small business "unfriendly" provisions. Does anyone have any good news for small professional service business in the bill?

 

[harley]

IMO the leverage provided by a low-interest mortgage outweighs the value of the mortgage tax deduction, so inability to deduct will not depress housing prices.

While I agree that the leverage is more (or at least as) valuable as the deduction, I don't think most people see it that way. So I do think it might depress housing prices a bit.

 

[kramer]

I have a small consulting engineering company that is an S corp and LLC. We have been able to claim a section 199 deduction in the past but the new tax bill eliminates that deduction. Unfortunately I will get hit with a $6,000.00 tax increase due to this elimination. We also see that that their are other small business "unfriendly" provisions. Does anyone have any good news for small professional service business in the bill?

Yes, if I understand it correctly, you just got a 20% pass-through business income tax cut on your income tax bill PLUS the business' income tax rates went down. This should be a huge tax decrease for you. See the pass-through business section of the linked Kitces article.

 

[Done]

In my reading of the tax bill, it appears that the 20% pass-through business deduction will apply to landlords. Before I get too excited, I'd like to confirm with this group. As a sole proprietor in the trade or business of rental real estate, my net rental income appears on Schedule E and is taxed on my individual return.

The committee conference notes say that the agreement follows the Senate amendment, with some modifications to the deduction percentage, thresholds and limitations.

For taxable years beginning after December 31, 2017 and before January 1, 2026, an individual taxpayer generally may deduct 20* percent of qualified business income from a partnership, S corporation, or sole proprietorship, as well as 20* percent of aggregate qualified REIT dividends, qualified cooperative dividends, and qualified publicly traded partnership income. Special rules apply to specified agricultural or horticultural cooperatives. A limitation based on W-2 wages paid is phased in above a threshold amount of taxable income. A disallowance of the deduction with respect to specified service trades or businesses is also phased in above the threshold amount of taxable income.

*I changed 23% to 20% based on the conference agreement.

Below the taxable income threshold of $157.5K ($315K for MFJ), a 20% deduction applies to qualified business income, which appears to include qualified income from Schedules C, E and F. Above the threshold, deduction limitations kick in.

So if a landlord has $50K in net rental income, $10K is deducted (independent of the itemized/standard deduction), leaving $40K taxed on the individual return. For someone in the 12% tax bracket, this effectively means that net rental income is taxed at a marginal rate of 0.8*12% = 9.6%.

I was assuming that this tax bill would cost me a bit more because of the SALT deduction limit, but this pass-through deduction would be a significant tax reduction. I think this means I would benefit by pulling rental expenses into this year where possible, such as rental property taxes. I’ll need to play with a spreadsheet.

 

[Katsmeow]

IMO the leverage provided by a low-interest mortgage outweighs the value of the mortgage tax deduction, so inability to deduct will not depress housing prices.

I would like to think that is true. Well, I think it is true myself. But, I think people as a group tend to overvalue the mortgage interest deduction. I know I have read that people thought that getting rid of it entirely would depress prices. Of course, they haven't gotten rid of it entirely but for houses in our price range I would imagine most people would no longer be itemizing. So I do wonder if it will have an effect and, if so, how quickly.... Of course, if it does, maybe it will benefit us when we buy (although we will probably buy a less expensive house).

 

[Done]

I have a small consulting engineering company that is an S corp and LLC. We have been able to claim a section 199 deduction in the past but the new tax bill eliminates that deduction. Unfortunately I will get hit with a $6,000.00 tax increase due to this elimination. We also see that that their are other small business "unfriendly" provisions. Does anyone have any good news for small professional service business in the bill?

As kramer said, the 20% pass-through business deduction should apply to you, giving you a large tax break. If taxable income is over $157.5K (or $315K MFJ), a deduction limitation based on W-2 wages comes into play.

Those with "personal service businesses" such as attorneys, accountants and doctors have another limitation if taxable income is over the same threshold. However, this does not apply to architects or engineers.

 

[FIRE'd@51]

IMO the leverage provided by a low-interest mortgage outweighs the value of the mortgage tax deduction, so inability to deduct will not depress housing prices.

IMO, the factor that drives housing prices from a mortgage rate point of view is the after-tax real rate of interest. Back in the early 1980's, even though mortgage rates were double digit (I paid 14% for a mortgage in 1980), the tax deduction plus inflation made the real rate of interest negative for most borrowers; so at the margin, it helped housing prices. Today the after-tax real rate is positive, and the loss/reduction of mortgage interest will increase that rate; so at the margin, I believe it will tend to depress housing prices, all else equal.

 

[Red Badger]

Sure, but they had to decide between which to sunset and which to make permanent.

Like others, I would have preferred that all tax reductions / breaks were permanent. However, if sunset had to be applied, I prefer it on the personal side. I have a firm belief that the 40% reduction is corporate tax is the Viagra of this bill. I am glad to see some relief for our household, but think the juice that's gonna run through corporations and the markets is an awesome Christmas present.

Also, I think there is a good chance that the cowards at the capitol will have a hard time taking away the candy when that part of the legislation comes due.