Business Matters

How Does The Final Tax Reform Bill Affect Real Estate? By Hal Sweasey

One of the big concerns people had while the tax reform bill was being written was that you could no longer do a 1031 exchange on an investment property. A 1031 exchange allows you to sell a non-owner occupied investment property and roll all the proceeds into another investment property without paying any taxes. They did make some changes to the 1031 exchange, but those changes don’t affect real estate, so that is good news. 
There was also discussion about reducing the deductible amount of interest on the size of your loan from $1 million to $500,000. Ultimately, they agreed on a $750,000 cap. From December 15, 2017 onward, if you take out a loan for over $750,000, only the interest on the first $750,000 will be deductible. 
If you have a $1 million loan right now, that has been grandfathered in. You will get the full deduction, even if you refinance the loan. That will have an impact on the upper end of the market, as will some of the deductions we lose for state taxes. If you have a home equity line of credit and you’re paying interest on that, check with your accountant, but I’m pretty sure that is no longer a deductible item. (See the chart below)
Going forward, there is a possibility of interest rates increasing from around 4% to as high as 5% (as of today they are already well above 4%). Prices will increase a little bit, and the market continues to be strong. 
Given the serious lack of available homes in spite of higher rates, I don’t believe the tax plan will have much impact on our market, and 2018 looks like another strong year for real estate.
See the tax reform law chart on right.

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