Real Estate Investor 2018 Market Outlook

2018 is shaping up to be a very interesting year for the housing market overall. The elephant in the room going into the holiday season is the reconciliation of the House and Senate tax reform bills. The mortgage interest deduction is getting a lot of attention, but according to the Urban-Brookings Tax Policy Center, there is too much hand-wringing about it.

From an article by William G. Gale, Co-Director of the Center: “First, let’s be clear: The mortgage interest deduction does not raise homeownership rates much, if at all. Countries like Canada, the United Kingdom, and Australia have no subsidies for mortgage debt, yet their homeownership rates are slightly higher than ours. Many new U.S. homeowners do not itemize or are in the 15 percent bracket or lower, so the mortgage interest deduction provides little or no current benefit to them anyway.”

While this is an interesting economic discussion, it really has nothing to do with real estate investors, as all of the provisions in both versions of the tax bill related to mortgages and the capital gains exclusion apply to personal property, not the business of real estate investment. Investors can still deduct mortgage interest and all of the normal and customary expenses of conducting their investment business and holding rental properties.

What will have an effect on real estate investors will be any changes in taxation of pass-through business entities. Most real estate investors fall into the pass-through category as sole proprietors, partnerships, or LLCs. As much of the focus of both the House and Senate bill versions is on stimulating the economy and helping businesses, lowering personal tax rates and bracket simplification should help investors overall. There is even discussion of a special “pass-through” rate or deduction of some of the investment income.

All of this considered, investors do need to be attentive to how tax changes will influence home ownership trends. There is a lot of hand-wringing about reducing or doing away with the mortgage interest deduction, reducing the property tax deduction, reducing the home capital gains exclusion, and particularly the deductions for local and state taxes. Lawmakers from high-cost housing areas with high local and state taxes are screaming that they will see a flood of higher income individuals leaving their states to move to lower cost areas.

One interesting thing about that not mentioned could be that they’ll sell that home and rent rather than move, so possibly there could be an opportunity for investors to move into higher priced markets with rental investing goals. If they love where they live and no longer get a tax break for mortgage interest, they may see renting as an option preferable to pulling up stakes.

The one thing we can count on is that there are a lot of high-income homeowners calling their accountants to try and plan for whatever the final tax bill looks like if it passes.

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