Tax Reform Impacting Home Ownership

Tax Reform and Real Estate

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.

Crowdfunding Your Real Estate Purchase

Real Estate has historically generated 9.6%+ returns with less volatility than the stock market. Unfortunately, since real estate Crowdfunding Your Real estate purchaseis typically expensive, ordinary investors have been left out of enjoying these profits.

Have you ever considered crowdfunding your real estate purchase?  Crowdfunding may be a term you don’t recognize.  Crowdfunding is the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the internet.

Crowdfunding has become something of a buzzword among investors, and it’s been particularly well received in the real estate sector. Though it is still relatively new, real estate crowdfunding is rapidly reshaping the way individuals find and invest in properties.

We live in a world of new technologies, a place where things that once seemed impossible are now considered the norm. Uber, Amazon, Airbnb and many others have completely changed the way people buy and sell goods and services. A Gofundme campaign, which is a form of crowdfunding, can be set up in minutes to get you to go visit faraway places, buy a new toy, help out a friend in need, or support a great cause.

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Owning vs Renting

Thinking about purchasing your first home? Right now is the to buy! The interest rates on home are historically low, which gives you more flexibility with your budget. When interest rates increase, it causes your monthly payments to increase, preventing you from buying a larger or more luxurious home compared to when interest rates are lower.

Let’s take some things into consideration. If you are renting a new place, typically to move in you need first months rent, a security deposit which is usually at the very least one months rent, application fees, security deposits, and if you have pets either a pet deposit or even a monthly pet rent! When it comes down to it, that is a lot of fees, some non refundable other are, but that is a huge chunk of money to put down on something you don’t own.

One of the main hinderances from purchasing a home is the dreaded down payment. But wait! Currently there are down payment assistance and loan programs for qualified buyers that only require 3% down along with closing costs. Once, you’re in your new home you’ll be paying around the same amount monthly as renting, and often time it is even less!

Our advise would be to come sit down with one of our trained professionals to hash out all the available options. Our broker, Echo Farrell recently got a young school teacher into her first home with only 0.5% down! Call us today!

Market Conditions

With all the new incentives to become a home owner, the housing market has been on the rise showing signs of stability. Recently, foreclosures have fallen back to the pre-housing bust levels. In February, 303 houses were foreclosed on, which was the lowest monthly level since Dec. 2006 with 211 foreclosures. By early 2007 the prices of homes began to fall and in December of 2009, the foreclosures were at an all time high of 5,000 a month in the Phoenix metro area.
Now, some are worried that this could potentially lead the housing bubble to pop, but according to a professional analyst from ASU it is unlikely to happen. Giant institutional investors have purchased a large number of homes that were turned into rentals in the Phoenix area around 2011. The worry is what would happen if they decided to unload these properties all at once? That could cause a flood in the market but with a very low vacancy rate on rentals, the investors have no reason to sell because they aren’t losing any money. Overall the housing market seems to be looking up, and with the increasing amount of jobs, especially in the tech field, will only cause the market to get better and better.

Reduced Mortgage Insurance Premiums

Earlier this year President Obama visited Arizona with a plan that will help more people the ability to afford homes by reducing mortgage insurance premiums. His plan is to cut the premiums in half for most first-time home buyers along with other existing home owners making owning a home more affordable for hundreds to thousands of people. The current premium sit at 1.35%.

This plan will will save the average buyer $900 a year on FHA mortgages. Mike Orr a real estate analyst with the W.P. Carey School of Business at ASU said that the market is slowly improving, and that this reduction of premiums is step in the right direction. With the rate reduction Obama went on to advise against buying something that is out of your price range, since these rates are for responsible buyers.

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