Tax Reform

Overview

On December 22, 2017, President Trump signed the “Tax Cuts and Jobs Act".

All individual provisions of the measure are generally effective after December 31, 2017 for the 2018 tax filing year and expire on December 31, 2025 unless otherwise noted. The provisions do not affect tax filings for 2017 unless noted. To read NAR’s analysis of the bill’s provisions impacting real estate, please go to "The Tax Cuts and Jobs Act - What it Means for Homeowners and Real Estate Professionals.

NAR will be providing ongoing updates and guidance to members in the coming weeks, as well as working with Congress and the Administration to address additional concerns through future legislation and rulemaking. Lawmakers have already signaled a desire to fine tune elements of The Tax Cuts and Jobs Act as well as address additional tax provisions not included in this legislation in 2018, and REALTORS® will need to continue to be engaged in the process.

The Tax Cuts and Jobs Act, the Final Tax Reform Bill Passed by Congress

On December 20, 2017, The U.S. House and Senate passed the conference agreement of the “Tax Cuts and Jobs Act,” marking a near end-of-the-road for Congress’s tax reform efforts this year. While the work on tax reform is complete for 2017, next year will likely hold opportunities to further improve the tax landscape for middle-class homeowners. 

The National Association of REALTORS® (NAR) worked throughout the tax reform process to preserve the existing tax benefits of homeownership and real estate investment, as well to ensure as many real estate professionals as possible would benefit from proposed tax cuts. Many of the changes reflected in the final bill were the result of the engagement of NAR and its members, not only in the last three months, but over several years.

The Tax Cuts and Jobs Act - What it Means for Homeowners and Real Estate Professionals

H.R. 1, the Tax Cuts and Jobs Act Conference Agreement

For more than a century American tax policy has recognized the value of homeownership to American middle-class wealth creation, strong and stable communities, and as a driver of our nation's economy. Homeownership is not a special interest, it is our common interest. NAR remains concerned that the overall structure of the tax reform bill poses problems for homeowners and the broader housing market, but the conference committee has made some important improvements to the House and Senate legislation outlined below that ultimately will benefit some homeowners and communities. We are particularly pleased with the treatment of capital gains on the sale of a home and the preservation of deductions for second homes. We are also grateful that the positive changes for commercial real estate and real estate professionals from the Senate bill have survived.

NAR Issue Brief: H.R. 1, the Tax Cuts and Jobs Act Conference Agreement

The Senate and House Bills before the Conference Agreement

The Tax Cuts and Jobs Act, the Senate Tax Reform Plan

The Senate tax reform bill, like its companion that passed in the House of Representatives, was a direct threat to homeowners and consumers. Not only would millions of homeowners not benefit from the proposal, many would get a tax increase. Additionally, homeowners could lose substantial equity from the more than 10 percent drop in home values likely to result if the bill was enacted.

The legislation passed by the Senate included changes to the exemption for gains from the sale of a primary residence, elimination of the deduction for state and local income or sales taxes, a cap on the deduction for real property taxes, elimination of the deduction of interest on home equity loans (unless the proceeds of such loans were used to substantially improve the residence), restrictions on the deduction for moving expenses to only active duty military, and restrictions on the deduction for personal casualty losses to Presidentially declared disasters. All this from a bill that was supposed to improve the current tax system.

H.R. 1, The Tax Cut and Jobs Act, the House Tax Reform Plan

As passed by the House and the Senate, H.R. 1 would eviscerate the current-law tax incentives for purchasing and owning a home for all but a small percentage of Americans (6 percent, according to the Joint Committee on Taxation).

By nearly doubling the standard deduction while eliminating most itemized deductions, the bill would destroy or at least cripple the incentive value of the mortgage interest deduction (MID) for the great majority of current and prospective homebuyers, and sap the incentive value of the property tax deduction for millions more.

The direct result of these changes would be a plunge in home values across America in excess of 10 percent, and likely more in higher cost areas. Provisions in the House bill would limit the deductibility of interest on new mortgage loans to $500,000 (for those few who could still itemize) and eliminate the deduction altogether for second homes. Both bills would also restrict the use of the exclusion of gain from the sale of a principal residence by increasing the number of years the homeowner must live in the residence from the current law's two of the past five years to five of the past eight years. The House bill went beyond this by limiting the exclusion to those with incomes of less than $250,000 (for singles filers) and $500,000 for joint returns (subject to a phaseout). And both bills would also limit the deduction for real property taxes to $10,000, again for those few homeowners who will still be itemizing their deductions. Perhaps even worse in the long run, many of these changes would not be indexed for inflation, increasing the pain on more and more homeowners over time.

NAR's research indicated that the average first-time homebuyer makes a down payment of less than 10 percent, meaning that millions of owners of recently-purchased homes would go "under water" on their mortgages, and they would owe more than the homes are worth. This, of course, could lead to devastating results for families that must sell, as well as damage neighborhoods, communities, and the economy itself.

The hard-won equity of millions more homeowners could be ravaged as well. Parents planning to use the value of their homes to help finance the higher education costs of children could find their resources shot, and baby-boomer homeowners nearing retirement who hoped to use their home's equity to pay for a portion of their retirement would have to delay or revise their plans.

The bottom line is that for tax purposes, owning a home would be treated the same as renting one for the great majority of Americans. This would reverse more than a century of pro-homeownership tax policy and result in untold negative economic and social implications.

While this tax reform legislation was being promoted as a tax cut for middle-income families, the reality was that millions of middle-class homeowners would immediately face tax increases, while those who saw a tax cut would see significantly less tax relief if they owned a home than if they were a renter.

Promoters of the House bill pointed to a "typical family of four" making $59,000 a year as an example of middle-class tax relief delivered by the bill. The family was renting a home, based on the facts presented, and was to receive a tax cut of $1,182 the first year after enactment. But if the family owned a home with a typical mortgage for their income level, the tax savings would be 36 percent less.

This may seem a minor difference to some, but the difference grows quickly as income rises. Consider again this same "typical family of four," but this time assign them a median family income of $73,000 rather than the median household income of $59,000 as per the example put forward by the House Ways and Means Committee. In this case, the renting family receives a tax cut of $1,478 under the bill, but the home-owning family would get a refund less than half what the same family would receive as renters.

Finally, looking at this same family, but with an income of $120,000, as renters, they would receive a tax cut under the House-passed bill of $3,408. However, as homeowners with a typical mortgage in a typical average-cost state, they would have a tax increase of $226. This hidden "homeowners penalty" would be an astounding $3,634. Further, the House version of the Tax Cuts and Jobs Act would not only eliminate the current tax advantages of homeownership, and thus discourages homeownership for many, it would actually encourage renting by allowing investors in residential property to continue to be eligible for full deductions of all interest and property taxes.

To make things worse, the relatively small tax cuts that many middle-class homeowners receive from both the House and Senate bills would vanish after just a few years. Based on the Congressional Budget Office forecast of inflation, income growth, and 10-year Treasury rates, coupled with the expiration of many of the provisions, most middle class families would see their modest tax cuts transform to tax increases under the plan compared to current law after five or eight years. NAR did not believe vanishing tax cuts, coupled with vanishing home equity, was a formula for growing our economy.

Homeowners currently pay 83 percent of all Federal income taxes. This percentage is likely to increase significantly under the Tax Cuts and Jobs Act. At the same time, long standing federal tax policy that recognizes the importance of homeownership to our nation would be eliminated for all but a fortunate few. NAR could not have supported these changes because REALTORS® knew that tax reform could be better than this. A tax reform bill that is projected to add $1.5 trillion to our national debt should produce very few, if any, losers. Unfortunately, it appeared that America's homeowners and owner-occupied real estate in general were by far the largest losers in that legislation.

Additional Information

U.S. House of Representatives Tax Reform Talking Points

U.S. Senate Tax Reform Talking Points

Side-by-Side Comparison of House and Senate Tax Reform Legislation

Political Advocacy

Current Legislation/Regulation

H.R. 1 - Tax Cuts and Jobs Act (Public Law No: 115-97)


In-Depth

Letters to Congress 
Congressional testimonies 
NAR Federal Issues Tracker


Legislative Contact(s):

Evan Liddiard
eliddiard@realtors.org
202-383-1083

Jamie Gregory
jgregory@realtors.org
202-383-1027

Regulatory Contact(s):

Evan Liddiard
eliddiard@realtors.org
202-383-1083


On December 22, 2017, President Trump signed the “Tax Cuts and Jobs Act”.  The U.S. House and Senate approved the conference agreement of the “Tax Cuts and Jobs Act” earlier in the week.

All individual provisions of the measure are generally effective after December 31, 2017 for the 2018 tax filing year and expire on December 31, 2025 unless otherwise noted. The provisions do not affect tax filings for 2017 unless noted.

To read NAR’s analysis of the bill’s provisions impacting real estate, please go to "The Tax Cuts and Jobs Act - What it Means for Homeowners and Real Estate Professionals."

NAR will be providing ongoing updates and guidance to members in the coming weeks, as well as working with Congress and the Administration to address additional concerns through future legislation and rulemaking. Lawmakers have already signaled a desire to fine tune elements of The Tax Cuts and Jobs Act as well as address additional tax provisions not included in this legislation in 2018, and REALTORS® will need to continue to be engaged in the process.

NAR Committee:

Federal Taxation Committee

References

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