Tax reform, is it taking away tax incentives? Or is it closing loop holes? The media and politicians are misleading us when this term is used. Tax loop holes are an unintended way around owing a tax. The mortgage interest deduction is an incentive for the purchase of real property. There is nothing unintended about the MID. It is in our tax code to provide an incentive to purchase real estate and become a homeowner. Our leaders and media must provide us with balanced information rather than skewing language for their own purpose. With tax reform limiting the benefit of the MID, the government is taking away a tax incentive. It is not closing a loop hole.
If we just focus on losing the benefit of the MID, we miss the big pictures. Losing this tax incentive is difficult for homeowners to accept after being able to use it for all of these years, but a strong economy will make this change irrelevant. This loss might lead to a very short term correction, on the order of a few months, but it is not enough to turn a strong economic market downward. Currently, the stock market is around 24,000 and the early holiday season sales numbers are up big. The economy appears to be taking off despite the currently proposed tax reform package. Even if we completely lose our MID, real estate will still appreciate during a period of economic growth. A robust economy will outweigh the disadvantage of a limited MID.
The media and the real estate industry have focused on this tax reform package limiting the benefit of the MID. In a heated economy, this loss will be of little consequence to real estate. One of the changes of concern that the media is paying little to no attention to is the change in the capital gains exclusion when selling the primary residence. The current exclusion for a married couple is $500k if the property has been a primary residence for two out of the last five years and $250k for single individuals. The current proposal increases the vesting period to five out of eight years. This does not seem like a major change especially when the average time period for living in a home has increased from seven to eleven years, but it might be in five years.
This change has more relevance when we break it down to demographics. The younger the group, the shorter they stay in one location. Millennials only average four years before moving on. This is a problem to people who are moving from job to job or getting transferred after three years. Under the current tax system, gains of up to $500k for married couples/$250k for singles are tax free. Under the newly proposed system, these families and individuals will be paying capital gains taxes on any appreciation if the time period is less than five years. The government will take away part of money that many use as the down payment for their next home.This change is likely to be a factor that slows down entry level home owners from selling and moving up three and four years from now because they will not be able to use all of their gains to buy upward. This might end up being insignificant, but it seems that it will be a factor that could effect the middle of the real estate market in five years.
This vesting change to the primary residence exclusion will not effect real estate or the economy before that time, if then. For now, our economy and real estate appear to be starting another period of growth. The current uncertainty many people have due to the currently proposed tax reform make this period the perfect time to be buying and selling real estate. Whether it is to sell in order to buy into a more desirable location or to buy as a first time home buyer, now is a great time to do it so that you are in front of the economic growth period.
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The December 5th caravan in Santa Ynez Valley had three notable properties to preview. The first home at 856 Adobe Creek Road in Solvang is an almost 3 acre property with 3 bed/2 baths and tremendous views. The home is listed at $1,675,000. The second notable property is in Solvang at 2698 Quail Valley Road. It is a 4 bed/3 bath home on 1.11 acres. The property is listed at $1,325,000. The final property, at 4145 Roblar Avenue in Santa Ynez, is a 26+ acre parcel with a 4 bed/3 bath 5,400 s.f. home. It is listed at $6,600,000. Other attributes include approximately 16.5 acres of Syrah grapes, a pool, and spectacular views facing south over the Santa Ynez Valley.
Please contact me if you have any questions, if would like to see any homes, or if you would like to receive a free market analysis of your home.
For more information, please visit us at Central Coast Landmark Properties.