How President Trump’s Tax Proposal could affect the housing market and 1031 like-kind exchanges

Monday, August 21, 2017

President Donald Trump released a new tax reform plan earlier this year. As the scheduled time frame for congress to take up this issue is upon us, there is still much speculation on whether tax reforms will come to pass, or how substantial they will be.

The most recent proposal could be one of the biggest tax cuts in history according to the White House. President Trump's plan could cut taxes for some middle-income and high-income families and reduce taxes for businesses of all sizes. The proposal could also cause a significant growth in the standard deduction, which decreases an individual’s taxable income, and would remove some common tax deductions such as those used to offset medical costs or state and local taxes.

“Major reforms are needed to lower tax rates and simplify the tax code, but that shouldn’t come at the expense of current and prospective homeowners.”

— William Brown, President of NAR

While on the surface, maintaining the mortgage deduction might sound like good news for everyone, many people in the housing industry have shown concerns such as the National Association of Realtors®, who said that “Major reforms are needed to lower tax rates and simplify the tax code, but that shouldn’t come at the expense of current and prospective homeowners.”

Here are the areas President Trump outlined in his proposal:

  1. A smaller tax cut for top income earners:

    The White House plan would decrease the top marginal tax rate for individuals from 39.6% to 35%, rather than the 33% proposed in the campaign.

  2. A smaller tax cut for middle-income individuals:

    The plan now states for a standard deduction of $24k for couples rather than $30k. This is still roughly twice as much as the current standard deduction and matches the House Republican plan.

  3. Repeal of the state and local tax deduction:

    The Trump campaign plan was unclear about which, if any, individual tax deductions might be eliminated, but the current White House proposal is more specific; the deduction for state and local taxes would be eliminated, while the deductions for mortgage interest, charitable contributions, and retirement savings would be preserved.

  4. A territorial tax system for business income:

    The campaign plan would have stopped the deferral of tax on income earned by foreign subsidiaries of US companies, and would effectively have a minimum 15% tax on foreign earnings. Instead, the new, revised White House plan would adopt a territorial tax system, which exempts foreign earnings from US tax.


Possible changes to 1031 tax exchange rules?

President of National Association of Realtors®, William Brown said that the mortgage interest deduction and the state and local tax deduction tax incentives help make home ownership more affordable. 1031 like-kind exchanges help investors keep inventory on the market and money flowing to local communities. 1031 like-kind exchanges and other tax incentives are at risk in the tax plan released last month. Current homeowners could very well see their home’s value plummet and their equity evaporate if tax reform nullifies or eliminates the tax incentives they depend upon. This could even cause prospective homebuyers to have to push their dream to own a home further away. Brown added to his statement that, “Realtors® support tax reform, and it’s encouraging to see leaders in Washington doing their part to get there. We believe tax rates should come down to the degree that sound fiscal policy allows, and simplifying the tax code will help ensure fairness and transparency for individual taxpayers. It’s a goal we share with the authors of this tax plan, but getting there by eliminating the incentives for homeownership is the wrong approach.”

The final tax plan has not yet been released. In the meantime, the NAR has started working with leaders in Congress and the administration to improve the tax code.

Syracuse University shows benefits of 1031 tax exchanges

The Whitman School of Business makes a compelling case for the benefits of Section 1031 of the tax code in their study "The Economic Impact of Repealing or Limiting Section 1031 Like-Kind Exchanges in Real Estate."  After studying more than 1.6 million transactions over 18 years among the facts they uncovered:

  1.   1.  1031 exchanges increase the velocity of real estate transactions--making a more economically responsive economy.
  2.   2.   Because taxes are deferred, a majority of real estate investors use the available capital to invest in renovations, which, in turn, spur the local economy.
  3.   3.   Researchers forecast that property owners would need to raise rents on residential properties by nearly 12 % to create a rate of return similar to the return available currently.
  4.   4.  Ultimately, the authors of the study discovered that taxes were not deferred indefinitely, but when investors finally "cashed out,"  they paid substantially more taxes due to the increase in value of the property and recaptured depreciation.
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  6. To learn more about how 1031 exchanges work, Read Katy's Story
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Defer your taxes with a 1031 exchange

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