Will recent tax code changes have an impact on high-end real estate investment in 2018? We’re taking a closer look at these changes today, in order to better understand how the market may be affected long-term. Investors and luxury developers have sky-high gains in mind, but a few specific changes may bring potential buyers back down to earth.
Mortgage interest deductions are now capped at $750K of debt. You can only deduct the interest on up to $750K of debt on a primary or secondary residence, applicable to all new loans taken out after 12/14/17. Current loans of up to $1 million are grandfathered in and are not subject to the new $750K cap. Homeowners may refinance mortgage debts existing on 12/14/17 up to $1 million and still deduct interest, but the new loan cannot exceed the amount of the refinance. All home equity line of credit interest deductions are capped at $100K, but must show evidence of funds being used to substantially improve the property.
State and local tax deductions take the biggest hit. Before 2018, you could itemize all of your state property, income, and sales tax. Today, this amount is capped at $10,000 per household, even for married couples.
Moving expense deductions now apply only to active duty military with orders to move. Looks like it’s bring-your-own-boxes from here on out for the rest of us.
What does this mean? What we’re actually seeing right now is noticeable sales growth without any immediate change in buyer sentiment. Luxury developments across the western region have been reporting strong sales—and show little sign of slowing down anytime soon.
The market could ultimately see less demand for properties close to the $1 million range, with buyers instead opting to purchase at or around $900K due to the recent change in mortgage interest deduction caps.
As homeowners become increasingly reluctant to give up the existing mortgage deduction cap that they currently enjoy, we may see more renovation and less resale activity. Good news for DIY-ers, bad news for first-time buyers. With fewer properties re-entering the market, new construction will likely experience a major boost.
Buyers looking to take advantage of moving expense credits may be slightly disappointed… but picking up the tab for some packing tape and patch kits isn’t too bad.