Corken Q&A: 2018 Tax Reform
This month Corken Q&A is dedicated to addressing client concerns about how the recently implemented Tax Cuts and Jobs Act might affect the Colorado real estate industry over the next few years. The tax reform bill was finalized just before the end of 2017 and will impact various tax structures, including income, property and mortgage taxes, from at least 2018 through 2025.
We spoke with two of our trusted partners—Alan Schrum, President of Residential Mortgage at First Western Trust, and Tim Weber, Senior Loan Officer at M2 Lending Solutions— to get the lowdown on what the new tax laws mean for Colorado homeowners, prospective buyers and sellers and the Colorado real estate industry outlook in general.
Q: How might the income tax modifications affect the real estate industry?
Subtitle A--Simplification and Reform of Rates, Standard Deduction, and Exemptions - (Sec. 1001) This section replaces the seven existing tax brackets (10%, 15%, 25%, 28%, 33%, 35%, and 39.6%) with four brackets (12%, 25%, 35%, and 39.6%) and specifies the income levels that apply for each bracket.
There are several aspects of the Tax Cuts and Jobs Act that could potentially impact Colorado’s real estate market. The change that will impact all Coloradoans regardless of their property holdings is the “Simplification and Reform of Rates” which decreased the income thresholds for several tax brackets. For most people, this will result in reduced withholdings and, thus, an increase in take-home pay, which may result in more dollars being invested into Colorado real estate in coming years.
“I think it will help people because they will take home more money on their check so they have more to spend,” Schrum states. “It’s not going to be negative.”
Another aspect that will affect most residents is the increase of the standard deduction to $12,000 for single taxpayer ($24,000 for married couples filing jointly.) Our experts agreed that not only will this make tax filing easier for some people because it reduces the need for itemizing, but it will most likely also result in bigger refunds for some.
“I don’t see how this will negatively affect Coloradoans,” Weber says. “If anything it should give them a bigger refund.”
Although our experts agreed that any resulting additional funds would likely be minimal, some people may choose to use this extra cash to buy a new home. These changes could be especially effective in helping people to make their first home purchase.
“I think it helps first time homebuyers,” Schrum concludes. “You’re going to see some wage improvement, you’re going to see some tax advantages, so people feel like they’ve got a little bit more money to spend.”
Q: How might the property tax modifications affect the real estate industry?
Subtitle D--Simplification and Reform of Deductions - The bill includes an exception that allows an individual to deduct up to $10,000 in state and local property taxes, in addition to taxes that may be deducted because they are paid or accrued in a trade or business or for expenses for the production of income.
The new tax bill introduces a new $10,000 cap on property tax deductions. Previously, this was unlimited. Although there was a lot of upset over this nationally, it’s not likely to have negative consequences for the majority of Colorado homeowners.
“I don’t see a major impact on the real estate market for owner-occupied properties from an interest write-off standpoint because the average sales price in Colorado is well under $750,000,” Schrum explains.
According to the tax calculator on SmartAsset.com, Colorado’s average property tax rate of 0.624 percent is well below the national average of 1.21 percent. In order for a home in Colorado to exceed $10,000 in annual property taxes its value would have to be higher than $1.5 million (although this varies slightly based on county laws.)
“I don’t think this will stop anyone from buying houses in Colorado,” agrees Weber.
Q: How might the mortgage interest deduction reforms affect the real estate industry?
Subtitle D--Simplification and Reform of Deductions - (Sec. 1302) This section modifies the deduction for home mortgage interest to: (1) limit the deduction to mortgages for a principal residence, (2) limit the deduction for debt incurred after November 2, 2017, to mortgages of up to $750,000 (currently $1 million), and (3) prohibit the deduction from being used for interest paid on home equity loans.
Both Schrum and Weber had similar thoughts about the reduction of the Capital Gains Exclusion. Again, seeing that the median home value in Denver is about $400,000, this law will not affect the majority of homeowners.
“I don’t see this as an issue in Colorado,” Weber asserts. “It only affects very high end and large mortgages, and most people in that category can afford to keep their mortgages under $750,000.”
Schrum does note that it could have more of an impact on those who own second homes if the combination of the primary and secondary mortgages exceed the new limit.
This aspect also removes the ability to write off the interest on a home equity loan, which may affect some homeowners depending on what their interest rate is.
“Home equity lines of credit are often used after people buy their homes to pull cash out to remodel a kitchen and things of that nature,” says Schrum. “It’s basically a way to not have to re-finance your mortgage but still access the equity in the home.”
Weber adds, “I don’t think not having an interest write off on the equity line will hurt the Colorado housing market because not that many people do them, and they aren’t usually for a huge amount, and if you’re using it for an investment home you can still write it off.”
Weber explained that this new law only pertains to owner-occupied properties, and that there is still no limit to the amount or type of interest you can deduct for investment properties.
Q: How should Coloradoans expect the local real estate market to change overall as a result of tax reform?
Both experts agreed that the overall effect on the Colorado job and real estate market should be positive.
“Changing the tax brackets should spur the economy a little bit, and the lower corporate tax rates could stimulate job market, too, which is good for economy,” Weber determines. “It’s hard to tell how this will really affect things until after next year, but overall Colorado should continue to thrive.”
“Overall, Colorado is still a place people want to live,” explains Schrum. “The job market is very strong, and you’ll continue to see people moving to Denver.”