In early November, the House GOP leaders took their biggest step yet in their attempt to overhaul the U.S. tax code by releasing legislation that proposes sweeping changes to the current system. The proposal unveiled a new top tax rate, new tax brackets, a lower corporate rate, and a compromise on the state and local tax deduction.
The implications of tax changes are wide spread. The question that most households are asking is “How is it going to affect me?” One of the changes in the spotlight is the treatment of taxes on mortgage interest. The National Association of Realtors, as well as the local Prescott Area Association of Realtors, have been paying close attention to the tax proposal and its impact on homeowners.
REALTORS® are on high alert since the tax reform could threaten most of the tax benefits of owning a home. The National Association of Realtors (NAR) is opposed to the tax reform legislation. “This bill is a direct threat to consumers, to homeowners and to our businesses. Not only will millions of homeowners not benefit from the proposal, many will get a tax increase. Additionally, homeowners could lose substantial equity from the more than 10% drop in home values likely to result if the bill is enacted.”
Below is a summary provided by NAR to help us understand some of the specifics of what the Legislation would do in the recent proposal.
- Caps the mortgage interest deduction at $500K for new mortgages
- Cap applies to new mortgage debt (but not refinancing) incurred after November 2, 2017.
- Limit is not indexed to inflation causing its value to even further diminish over time.
- Income from passive activities would be taxed entirely at the 25% rate. This means that all rental activity is taxed at a 25% rate.
- Increases the standard deduction. Puts homeownership tax incentives beyond the reach of more than 90% of American families.
- New rules would require homeowners to live in their home for 5 of 8 years before a sale to qualify for the exemption, versus just 2 of previous 5 years with the current legislation. This will create a hardship to homeowners who have to move inside that five-year window.
- Exemption phases out for single filers with incomes over $250K ($500K for joint returns).
- Eliminates the deduction for state and local income or sales taxes.
- Eliminates the Mortgage Interest Deduction for second homes.
- Eliminates the deduction for moving expenses.
- Eliminates the deduction on interest on student loans.
- Eliminates the deduction for medical expenses.
All communities in Arizona are going to be impacted by these proposed changes. Prescott, Arizona, residents need to brace for the changes as well. The Prescott Quad city area is comprised of four thriving communities: Prescott, Prescott Valley, Chino Valley, and Dewey-Humboldt. These are diverse communities with approximately 1,300 homes for sale at any given time, ranging in price from $50,000 to $5,000,000.
Prescott, who has a population of around 41,000 people, has a unique economic structure with it being a blended community of families and retirees. The median resident age is 56.7 years, whereas the Arizona median age is 37.4 years. The growth is also evident in the household income figures, the estimated median household income in 2015 was $48,210 (Arizona’s average is $51,492), that is up from $35,446 in 2000. With the Prescott area being heavily populated with middle-class homeowners, the local REALTORS®, community leaders, and business owners are paying close attention to the recent Tax Reform proposal. House Ways and Means Committee Chair Kevin Brady, the author of the tax bill, said the House should pass the plan by Thanksgiving.
As homeowners and potential homeowners, it is important to know the implications of the tax reform. Millions of middle class homeowners would see a tax hike under this proposed plan. In addition, if homeowners buy a home and then have to move within 5 years, they could be hit with a significant tax bill under this plan.
REALTORS® spend a significant amount of time keeping informed on laws and strategies to help guide their clients. Visit http://lil.ms/1vd4/48auqe for more information on how this legislation will affect homeownership, visit CLARealty.net, or give CLA Realty team a call at (928) 662-9200.