The owners and Sales Executives at The Trembley Group Real Estate have been fielding a lot of calls lately about the ramifications of the proposed suggestions for tax reform coming out of the White House and Congress. It is not surprising. The press coverage has been mixed. Publications as diverse as the New York Times and the Wall Street Journal report that the proposals could be the end of any incentives to buy a home. However, other respected business publications like Forbes and popular press outlets respected for accurate reporting like USA Today seems to think the proposed changes in the Tax code will not be a big deal, particularly for real estate.
The tax proposal that’s come out of the House of Representatives calls for a cap on the interest deduction. The current cap is for interest on mortgages of $1,000,000 or less, used to buy, build, or substantially improve a primary or secondary home. The current law also allows a deduction for interest on home-equity loans up to $100,000 on primary or secondary residences. The proposed tax code would reduce the mortgage cap to $500,000 per year, only on a primary residence with no interest deduction for a second home mortgage or a home equity loan.
The other major change affecting real estate would cap the deduction for real estate taxes paid on a primary residence. The deduction for property taxes would be limited to $10,000 per tax return, not per home.
Among the 20 Republican “no” votes on the budget were 11 New Jersey and New York representatives, who said they could not accept proposals to eliminate the deduction for state and local income, sales and property taxes. Republican Frank LoBiondo of New Jersey is not convinced the current proposal is a good idea. “The elimination of state and local income tax deductions and the $10,000 cap on property tax deductions would be detrimental to New Jersey residents,” he said. “This bill is not something I could support in its current form.”
And President Trump has gone on record saying, “We are just getting started, and there is much work left to do,” he said. “The special interests will distort the facts, the lobbyists will try to save their special deals, and some in the media will unfairly report on our efforts. But my Administration will work tirelessly to make good on our promise to the working people.”
The famous phrase, “All politics is local,” is most commonly attributed to Tip O’Neill, former Speaker of the United States House of Representatives. He authored a book by the same name.
It has also been said that all real estate is local. Most people have heard the expression, “The three most important considerations in buying real estate is location, location, and location.” Location is the principal determinant of value in real estate. Specific reasons why people want one location vs. another have to do with factors like schools, transportation, commute times, etc. that all affect quality of life. The reasons people use to understand value in real estate vary greatly in each small locale. Those aspects can vary from house to house and block to block. It’s hard to imagine anything more “local.” Unlike other asset classes, real property must remain exactly where it is; it cannot be moved. That means it is captive to the nuances of the market in which it is located, hence the term “all real estate is local.”
Real estate in Myrtle Beach and along the Grand Strand is a value compared many areas in the eastern United States. A Trembley Group client recently sold a home in Westport Connecticut. The house sold for $1,300,000, just slightly more than the median house sale in that area of Connecticut. The buyer used a slightly less than 80% first mortgage of $1,000,000 to make the purchase. Under the current tax code, all of the interest paid on the first mortgage will be deductible. The proposed tax law would limit the deduction to interest paid on the first $500,000 of the mortgage.
At the time of the sale, the Trembley Group client was paying just over $26,000 per year in real estate taxes. Under the proposed tax law revision, the buyer of the Connecticut property would be able to deduct only $10,000 of the $26,000 real estate taxes and only half the mortgage interest would be deductible.
There’s no doubt the purchasers of the Westport home are in a federal tax bracket that will let them take full advantage of the property tax and mortgage interest deduction. And lucky for them, if the tax code is amended with the mortgage interest and property tax limitations, their new purchase will be “grandfathered” and they will be able to continue using the full interest and property tax deductions.
A buyer under the proposed tax law would find their itemized deductions for their mortgage interest and property taxes reduced by roughly $40,000 per year. And while the new buyers would not be affected by the proposed tax code revision, unfortunately, the revisions will most certainly affect the number of buyers able to buy the property in the future and more importantly, what any future buyer will be willing to pay for the property.
But Westport, Connecticut is not Myrtle Beach, South Carolina. And Myrtle Beach is not in New Jersey. Myrtle Beach has more beautiful beaches than both places. And while the top of the Myrtle Beach real estate market can go into the millions, along the Grand Strand it’s still possible to live in upscale neighborhoods with waterfront access and top-of-the-market amenity packages for about $500,000, with property taxes less than $10,000. According to Zillow, the median price listings for properties in the Myrtle Beach area are as follows:
Surfside Beach $309,900
Horry County $156,400
Murrells Inlet $213,400
Pawleys Island $279,400
North Myrtle Beach $205,400
And property taxes? Homebuyers looking for low property taxes should check out Horry County. The average effective property tax rate in Horry County is just 0.39%, second lowest in the state. At that rate, taxes on a home with a full market value of $200,000 would be $780 per year.
“Reforming our nation’s tax code will fundamentally reorganize 100 percent of the United States economy,” wrote Rep. Richard Neal of Massachusetts, the senior Democrat on the Ways and Means Committee. “It would be reckless in the extreme to rush this process through committee next week. … Let’s slow down and get this right.”
But while there is division in the GOP on details, there is almost unanimous support for getting the tax bill passed this year because members do not want to go into the 2018 midterm elections without a significant legislative achievement.
It is unlikely that the tax code revision will survive in its current form. Many politicians on both side of the aisle have gone on the record as not being able to support the proposed revision of the tax code in its present form.
According to Holly Schreiber, a Trembley Group Sales Executive and a CPA and former banker, “About 64% of Americans own a house. Roughly two-thirds of those homeowners have a mortgage. Only 6% of all mortgages are for $500,000 or more,” she says. “Put all those numbers together and you will find that the many who think their world is ending over tax policy changes to real estate taxes and the mortgage interest deduction are worried about only 2.5% of American households. Plus, existing mortgages are grandfathered in, so anyone who purchased a home expecting the deduction will continue to enjoy it.”
The Trembley Group Real Estate does not provide tax, legal or accounting advice but they do know the Myrtle Beach and the Grand Strand real estate market and they are current on the tax code as it applies to residential real estate. And while you should consult your own tax, legal and accounting advisors before engaging in any transaction, The Trembley Group Sales Executives are always available to answer questions and discuss purchase options. Give Holly Schreiber or any of sales professionals at The Trembley Group Real Estate a call start a process that could be one of the most lucrative of a lifetime.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice.
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At The Trembley Group, we pride ourselves on being the experts at more than just selling real estate. We are local residents, some of us have been here for a lifetime. The rest of us will be here until the end of time. We love living, working, and playing in the diverse backyard of Coastal Carolina, and look forward to helping you live and love your dreams soon too. Please reach out to us by phone or email for personalized service and one-on-one advice.