The new tax reform is going to change the shape of the US real estate market. It will bringing both short term and long term benefits to Florida. International buyers already have very strong ties with the Sunstate. Yet they will continue to buy only if the internal market stays strong. This is the essential “rule” elaborated by Lawrence Yun, Chief Economist and Senior Vice-president of the National Association of Realtors. We are reporting directly from his keynote speech at the recent 12th Annual Global Conference in Sarasota.
Originally due last Summer, his speech was canceled because of hurricane Irma, which forced the whole Conference to be rescheduled. But this time Dr. Yun was also able to detail the vast reaching consequences of the US tax reform. With special attention to its impacts on the real estate industry.
In order to remain attractive for international investors, Florida needs to maintain a growing trend with increasing property values. International buyers typically buy cash or with limited leverage. They look for places that will give them the best potential return. The choice is also based on familiarity and accessibility. The growing presence of foreign companies in Florida will also increase the number of foreign buyers.
The widening of the Panama Canal will bring Chinese buyers all the way to the East Coast. They are gradually moving away from California and the West Coast which they have been patronizing so far. Major commercial vessels now coming all the way to East US. New business and capital will also arrive from China.
But Mr. Yun explicitly highlighted the importance of the battle fought by 350,000 Realtors in shaping the new tax reform and the fundamental impacts this has on the real estate market as a whole, including the global aspects. Such is the number of members of NAR which rose to the challenge and contacted their elected representative in Congress to make their voice heard.
The Good and Bad of the Tax Reform
The major concern during last year, as Mr. Yun noted, was the projected elimination of the mortgage interest deduction and of the property tax deduction. Many US buyers rely on both deductions in order to purchase real estate. Their elimination would have had dire consequences on home sales and on the economy as a whole. Congress also planned to change from 2 years to 5 years the minimum term that home owners had to keep their homes in order to be exempt from capital gain taxes at the time of the sale.
NAR worked to make Congress aware of the fact that home-ownership would have been reduced by removing the deductions. It also showed how the 5 years minimum term was going to badly affect military families as well as people who need to make their move in order to improve their life.
The final text of tax reform was amended so to maintain the 2 years minimum term and to cap the mortgage interest deduction at $ 750,000 and the property tax deduction at $ 10,000. This means that a buyer with a $ 500,000 mortgage won’t be affected by the tax changes and that the majority of homeowners in Florida will still be able to deduct property taxes. According to the figure provided by Mr. Yun, 95% of property owners in Florida have mortgages which are lower than $ 750,000 and 98% of them pay less than $ 10,000 in property taxes.
The states that will actually have a negative impact from the Tax Cuts and Jobs Act are New York, New Jersey, Connecticut, California, Illinois. These are areas where the mortgage values are often above $ 750,000 and owners pay much more than $ 10,000 in property taxes.
People from these states will flock to Florida, where they will benefit from lower taxes and a better climate. This will happen gradually, as they reach their retiring age or have the chance to relocate their business or career in Florida.
The Standard Deduction Increase Will Spur New Sales
The tax reform has also increased from $ 12,000 to $ 24,000 the standard deduction for everyone. This will put more money in the pockets of buyers and will give them a better chance to save their down-payment. Dr. Yun also suggests that this standard deduction is so strong that it will even eliminate the need of a mortgage interest deduction. Many buyers will simply abandon the itemized deductions and will just go with the standard one. And when times will change and their financial situation will require them to itemize again, they will be able to do so.
The reduction of corporate taxes, which extends to small businesses as well, will increase the chance of investors coming to the USA and to Florida in particular. This will fuel an expansion of global buyers from some selected countries. We will explore it in more detail in the next article.