The U.S. House of Representatives and the U.S. Senate have each introduced tax reform bills. This brief clarifies certain points related directly to the real estate industry, particularly for the Myrtle Beach metropolitan area. In general, the Senate bill is more favorable for the housing industry, and the Tax Foundation’s economic and fiscal analysis suggests it is a “pro-growth” tax reform plan.i

Two key housing industry groups have publicly released separate opinions of the proposals. The National Association of Realtors opposes the House bill.ii The National Association of Home Builders also opposes the House plan, but considers the Senate plan “a big step forward.”iii

The NAHB points to two key improvements in the Senate bill relating to homeownership. These two points are of particular relevance for the Myrtle Beach area economy. They are:

1. Mortgage interest deduction cap at $1 million instead of the $500,000 cap in the House plan.

2. Mortgage interest deduction for second homes is retained instead of eliminated in the House plan.

The $1 million cap on the mortgage interest deduction helps the real estate markets of Northeastern states (compared to the House plan), such as New York, New Jersey, and Connecticut where home prices are much higher relative to the Grand Strand. Downward pressure on prices in the Northeast would affect the market in the Grand Strand significantly because of the high proportion of in-migration from these states. The Senate plan nearly restores the cap to its current level ($1.1 million).

The mortgage interest deduction for second homes has a more direct effect in the Grand Strand market. As a major recreational vacation destination, second homes comprise a significant share of our transactions. The Senate plan protects this deduction.

Both bills double the standard deduction and eliminate the deduction of state and local taxes, including property taxes. The ultimate impact on home prices is not clear, although the general effect would be a reduction in home prices if the median homebuyer’s after-tax income declines as a result.

Another change in both bills concerns the avoidance of the capital gains tax upon the sale of a principal residence. Currently a homeowner must live in a home at least two years to avoid the capital gains tax on any profit from the sale. Both bills extend the required stay up to five years. However, there are circumstances allowed that mitigate this tax impact, including a move required for employment. The average length of time a seller has occupied a principal residence until sale has increased from an average of less than 4.5 years from 2000 through 2009 to now over eight years according to transactions data from Realtytrac.iv Certainly the speculative house-flipping activity faces this tax; however, this activity is generally subject to the tax in the existing tax code, and the size of the market activity for longer-term flippers (two years plus) is likely very small.

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