By Andrew Falduto
On November 16, with a vote of 227 in favor and 205 against, the Republican-controlled House of Representatives passed the "Tax Cuts and Jobs Act," a bill that reforms the federal tax code as the first of its kind since 1986. At the International Franchise Association’s Franchise Expo West, Secretary of the Treasury Steven Mnuchin stated "The Tax Cuts and Jobs Act is a bold, pro-growth bill that will overhaul our nation’s tax code for the first time since President Reagan’s historic tax reform 31 years ago," The bill was sponsored by Representative Kevin Brady (R-Texas), Chair of the House Ways and Means Committee, who claimed the bill is estimated to deliver $1.51 trillion in tax cuts over the next decade. The bill offers the greatest effect on the real estate market of any tax-related bill in recent years. Most notably, it would reduce potential deductions for property taxes levied by municipal governments, reduce tax deductions on mortgages, and indirectly decrease overall capital gains taxes on real estate.
Prior to this bill, in most cases, property taxes and other taxes paid to municipal governments could be mostly or entirely deducted from one’s federal tax payments. However, the bill passed by House republicans would, unless amended by the Senate, eliminate municipal tax deductions that are not a part of property taxes. The property tax deduction would also be limited to $10,000. Considering the average American household pays $2,149 in property taxes, this revision to the tax code would not greatly affect the majority of people; however, it would contribute to the disproportionate taxation of the upper class. These property taxes are most commonly determined by a percentage of the property’s purchase value, therefore this bill would discourage the purchase of expensive houses with property taxes significantly higher than $10,000. The essentially higher tax rates on these highly valuable properties would obviously decrease the demand for their purchase, as people would be less willing and less able to handle the tax burden attached to them. This could in turn force home sellers to lower the asking prices of homes on the market, thus significantly decreasing the nominal gross domestic product (GDP), and slightly, but surely, decreasing the nation’s real GDP, causing an overall negative economic effect, not only for the rich, but for the populace as a whole.
The bill also proposes another deduction limit that mainly targets the rich on its surface. The new mortgage interest deduction under the bill would be capped at $500,000, meaning that those who pay over $500,000 in interest on their mortgage would not be able to deduct more than said $500,000 from tax payments. Based on the average home value in the United States of $221,800, and the average mortgage interest rate of 4.75%, a very small amount of very wealthy people would be affected by this. However, it must be taken into account that the richest 1% of people in the United States posses about 38% of all privately held wealth, so while a very small portion of the population is affected, a very large portion of the wealth is being potentially paid to the government. This revision to the tax code could also bring issues to first-time home buyers due to their lack of liquid assets, so while it may be most detrimental to the rich, the overall economy could become much less suitable for the very wealthy, possibly promoting the use of international banks rather than contributing to domestic money supply.
The Tax Cuts and Jobs Act, as it was passed by the House of Representatives, does not directly change the capital gains tax or the dividends tax; however, they are indirectly lowered by the lowering of federal income taxes. The decrease from seven income tax brackets to four brackets, and an average decrease in tax rates of about 5-10%, depending on income, would result in much lower capital gains taxes on assets that are held for less than 12 months. Therefore, the short term home investment, or “flipping”, market would be sure to benefit. Short term investments, property owned for less than 12 months, would be taxed at the same rate as income tax for the seller, meaning that the overall decrease in tax rates would aid in creating a more profitable market and therefore, more economic activity in the real estate market. As for long term investments--property owned for more than 12 months--the market would be essentially unaffected by the bill, with the exception of an increase in disposable income for the middle class from lower tax rates, promoting more housing exchanges and purchases.
On a national level, the housing market would decrease in value due to the House-passed GOP tax bill, and wealthiest few would be the ones immediately affected. This is not surprising based on the Republican Party’s recent attempt to shift the public image of the party away from the “pro-rich” party, and more towards the “pro-middle class” party in order to be successful in midterm elections in 2018.