For the immediate future, it’s the capital gains changes that will have the greatest reverberations. Currently, homeowners are allowed to exclude up to $250,000 in capital gains ($500,000 for married couples) when they sell a primary residence.
The existing rule states that owners must have lived in the home for two of the last five years of ownership. The new plan would require that the homeowner must have lived in the home for at least five out of the past eight years.
The changes also allow one sale every five years instead of every two. The exclusion is also diminished by a dollar for every dollar a joint taxpayer’s adjusted gross income exceeds $500,000. The markets that will be most strongly impacted are those in the Northeast and on the West Coast. In some of the areas, where luxury properties have already lingered on the market, many sellers may opt not to sell after all.
In markets such as San Francisco, the combination of high prices and low affordability have already taken a tremendous toll; the proposed tax plan may create added stress on the region. In places like New York where property taxes are high, the part of the plan that would cap the property tax deduction at $10,000 would also have a big impact.
Jerry Howard, CEO of the National Association of Home Builders, told USA Today that “3.7 million households paid more than $10,000 in property taxes in 2016.”
What the tax bill will do is provide new constraints and considerations as people begin to contemplate making their next moves.
What we may see in the short term is a bit of a seller stampede as sellers try to sell now and maximize their profits. For example, if buyers purchased a home for $1 million and then had a $1.25 million sale, they could see nearly half of their profit out the door in taxes and fees.
In the long term, the proposed changes could also affect how owners feel about commissions. The middle of the market is where taxpayers will get squeezed the most, and that is also where agents make the biggest chunk of their earnings. With a smaller piece of the profits from each sale going back to the seller, every percentage point will be up for debate.
It’s too soon to know whether the proposed tax reform will successfully make it through the legislative process, but at this point, all things point to a more favorable environment for the very high-end and uncertain times for most American homeowners and the real estate community.