Tax Code Affect the Real Estate Market

Shall I buy or shall I rent due to the tax code changes?

tax code The new tax code will bring major changes for all of us. All changes worth analyzing and discussing since they will directly impact our income.

Here are the 8 most important changes in the tax cuts and jobs act

  1. Reducing corporate tax rates. The corporate-income-tax rate would be reduced from 35 percent to 20 percent.
  2. Pass-through business income at a maximum rate of 25 percent.
  3. Some of the tax code’s disincentives to investment roll back.
  4. The U.S. move to a territorial tax system.
  5. Many itemized deductions are eliminated
  6. Transformation of gift and estate taxes.
  7. The tax treatment of interest would change.
  8. Tax expenditures are curtailed.

But, when talking about real estate the following proposed changes are critical:

  • Preservation of mortgage interest deductions for existing mortgages and new purchases just for loans of $750,000 or less.
  • The deductions cap for property taxes at $10,000.
The old dilemma of buying versus renting becomes once again current. So, let’s do the math and crunch some numbers and see if under the new circumstances renting will not become a better option in comparison with buying. If you already have or need to get a jumbo loan, the impact will be major for you will not qualify for any mortgage interest deductions. If you need a lower mortgage loan you will get a mortgage interest deduction, but this will be caped. Let’s refer to a house located in Las Vegas, Nevada, acquired at the end of 2017 or early 2018, having a purchase price of 295,000.  The basis for the calculation was selling the home in 9 years time. The loan was not paid in full at the moment of sale.

Here is what the estimated cash flow is telling you:

  Buying Renting Year 1 Renting year 9
Monthly P &I $1,341 $1,700 $2,256
Property Tax /Ins $449 $20 $20
Maintenance & Repairs $125 $0 $0
Monthly Expenses $1,916 $1,720 $2,276
Total Cashflow $206,914 $214,544
In nine years you will get a cash flow difference of $7,630 in favor of purchasing the house. Of course, if you sell early in the first couple of years, then renting makes more sense than buying. We forecast that your property will appreciate in the next nine years at the historical appreciation rate of 3.48%, meaning that in nine years your Appreciated Home Value will be $401,356. If you subtract your Initial Cash Outlay of $12,344 and the Cost to Sell of $24,081 as well as the Remaining Principal of $233,716 and then, add your Tax Benefit ($0), and your Cashflow Difference of $7,630 the result will be a Net Gain of $138,845. These calculations are true for the Las Vegas Nevada. For other cities and states the numbers can show a different story.  Sometimes even higher Net Gain like in Arapahoe County, Colorado where the net gain is $176,496 for a house purchase with $510,000 that appreciates in nine years up to $591.369. The extra money is due to the cash flow difference of $40,899 between buying and renting for in Arapahoe County, Colorado the historical rent increase is higher than the one in Las Vegas, Nevada.
Moving Forward
According to Ralph McLaughlin, Trulia’s chief economist the impact of the tax code changes would be strongest for middle-income renters considering about making the jump to homeownership. Another aspect that concerned real estate professionals was the potential elimination of 1031 exchanges, that allow investors to defer capital gains taxes on property sales via reinvestment. This was repealed and 1031 exchanges are still allowed.  Real estate investors may continue to defer or even eliminate capital gains tax.  To do so they must use the proceeds from a sale to reinvest in a similar kind property. In conclusion, do the calculation for the area you want to live and decide on facts, not on gut feelings. If you are in Las Vegas or you want to move here contact Casey Moseman.  We can find together the best mortgage product that fits your needs, regardless the tax code we are operating with.  
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