When President Trump signed the Tax Cuts and Jobs Act on December 22, 2017, he accomplished a number of things with a single swipe of a pen. Those things included:
- Cutting the corporate tax rate from 35 to 21 percent
- Cutting the top individual tax rate to 37 percent
- Reducing income tax rates
- Doubling the standard deduction
- Eliminating personal exemptions
The tax cuts were an integral part of the president’s campaign platform and, many supporters felt, crucial to the success or failure of his first year in office. Critics of the plan felt equally strongly that the cuts were a dismal attempt to give “tax breaks to the rich.” In the middle of all this, the Federal Reserve weighed in with some surprisingly positive forecasts based on the new legislation.
Helping the Middle Class
According to the Fed, the tax cuts have already led to an increase in consumer and business spending. This is good news for the country as a whole, but it is particularly good for the middle -class consumer, the Fed noted. National Association of Homebuilders (NAHB) chairman Granger MacDonald agreed. “This comprehensive overhaul of the nation’s tax code will help middle class families,” he said. Some have criticized the bill for providing a number of tax breaks on the high end of the income spectrum, but supporters say that the reduction of income tax rates and doubled standard deduction will help at all levels.
Economic Benefits and Rising Real Estate Values
Perhaps the biggest benefit to real estate investors will be the projected rising real estate values associated with these tax cuts. In response to the legislation, the Fed boosted projections of real gross domestic product (GDP) growth over the next few years. Although some real estate groups, including the National Association of Realtors (NAR), warned prior to the bill’s passage that the doubled standard deduction might lead fewer people to take advantage of the mortgage interest deduction (MID), a hot topic in and of itself, the NAHB has already adjusted its position, as evidenced above. Furthermore, some analysts say that fewer homeowners taking the MID might stabilize housing prices in hot housing markets, thereby preventing potential bubbles from forming.
More Details on MID
The tax bill does not, as many originally feared, eliminate MID. However, it does limit the amount of interest that a homeowner may deduct in fairly substantial ways. First of all, you may now only deduct the mortgage interest on the first $750,000 of your home loan. Secondly, you may not deduct interest on home equity lines of credit (HELOCs). If you already have a larger mortgage and are taking MID or are deducting the interest from a HELOC, however, then you can continue to do so.
The “Crystal Ball” Effect
So far, the biggest direct effect that the tax reform bill seems to be having on the general population is that there is an air of optimism in the corporate world. A number of major companies have already announced large hiring sprees in 2018, raised salaries and wages, and begun planning expansions into new markets. All of these moves are good for housing in the areas where those companies are expanding and good for homeowners and homebuyers who may not have more income with which to make home purchases. However, the real effects of the tax reform bill will likely “flesh out” over the coming months. Watch closely to determine the degree to which 2018’s early projections appear to be coming to fruition before making big changes to your investment strategies.