Q&A: What’s the Next Move on Tax Reform?

Republican lawmakers in conference committee Wednesday announced a tentative agreement on melding the House and Senate versions of tax reform into a final bill. A formal vote is expected soon. The National Association of REALTORS® is seeking changes to make the final bill less harmful to homeownership. Here’s a Q&A on what to look for over the next week or so based on a Facebook Live event NAR hosted yesterday. Participating in the live discussion were Iona Harrison of Pioneer Realty in Upper Marlboro, Md., and the incoming chair of NAR’s Federal Policy Committee; Jerry Giovaniello, NAR chief lobbyist; and Evan Liddiard, NAR’s senior representative for tax policy. Jon Boughtin of NAR Media hosted the event.

Q. When might Congress have a final bill to send to the president?

A. The conference committee opened today with each member of the committee making statements. The committee is expected to report out a final bill by Friday. That bill must be passed by both houses of Congress. Those votes are expected Tuesday and Wednesday of next week, making it possible the bill could be before the president by Christmas.

Q. What is NAR’s position on the bills?

A. Both bills are bad for homeowners and home buyers as well as the larger economy. Both double the standard deduction and offset that cost by eliminating personal and dependency exemptions, and both eliminate most itemized deductions. These changes are a recipe for reducing the percentage of households that itemize from 30 percent to an estimated 5 to 6 percent. That matters for two reasons. First, if a household doesn’t itemize, it gets no tax benefit from being a homeowner versus a renter, a distinction that’s been in the tax code for 100 years. Second, five years down the road, if only 5 to 6 percent of households are itemizing, Congress could very well decide to eliminate the mortgage interest deduction and other deductions homeowners care about, on the grounds that too few prople take them to keep them in the code.

Q. What changes is NAR seeking?

A. There are three. First, take the Senate version on the MID, because it leaves the current law in place while the House would limit the maximum mortgage amount to $500,000, half the current limit of $1 million. Second, modify both the House and Senate bills on the capital gains exclusion on the sale of a principal residence. The exclusion is $250,000 for individuals and $500,000 for married couples. Both bills require a household to live in the house for five of the last eight years instead of two of the last five years, a change that will force many households to pay capital gains tax on their sale proceeds. The bills also phase out the exemption for households earning $250,000 or more. These provisions, if not changed back to current law, will prevent many households from selling and will penalize households that have to sell for reasons not entirely in their control, like death or job relocation. NAR estimates that 22 percent of homeowners sell their house after owning for less than five years. As a side note, forcing more households to pay the tax goes against the goal of simplifying the tax code, because figuring out the tax amount on the sale proceeds is one of the most complicated provisions on the individual side of the tax code. And third, restore current law on state and local tax deductions. Both bills retain the property tax deduction but cap it at $10,000. NAR would like to see that increased. Both bills also eliminate the income tax deduction, an especially big hit for households in high-tax states. NAR wants to see all or some of the deduction added back in. Among other things, eliminating the deductibility of the tax could force states to shift a greater share of the tax burden onto homeowners.

Q. What are some of the expected economic effects of the tax changes if improvements to the bill aren’t approved?

A. There are three: First, interest rates will go up, because the tax plan is expected to increase the U.S. budget deficit by up to $1.5 trillion over 10 years. Rising deficits tend to put upward pressure on interest rates. Second, home values will drop, by at least 10 percent on average on a nationwide basis, as markets adjust to the loss of tax incentives for homeownership. Because of that drop in prices, some households who have only recently bought or who buy in the next few years could find themselves underwater almost immediately. And third, economic growth could slow, the result of the hit on homeownership, which is still recovering from the economic downturn several years ago and which plays a key multiplier effect on the economy as buyers spend money on new furniture and remodeling projects, among other effects.

Q. Is the tax bill all bad for the real estate industry, or are there good things in it, too?

A. There are good things in it and NAR supports those. Among them, the Senate version of the bill would help small-business owners and others who operate their businesses as independent contractors or through pass-through businesses, such as partnerships, limited liability companies, or S corporations. Details are in flux on how these so-called pass-through entities will be treated, but they are likely to see their rates go down. The bill also has several positive aspects for commercial real estate; first among these is the treatment of 1031 tax-deferred like-kind exchanges. These exchanges are a big driver of commercial real estate transactions and both versions of the bill keep current law for real estate in place, as NAR sought. What’s more, the bills include positive provisions on business expensing and property depreciation.

Q. What was the response by REALTORS® as these bills were being considered in their respective houses?

A. REALTORS® delivered a record response to NAR’s Call for Action. More than 215,000 REALTORS® sent letters to their members of Congress. NAR President Elizabeth Mendenhall issued another Call for Action last week to help push for the changes NAR seeks during the conference committee.

Watch the Facebook Live event.

Access a chart showing differences between the two bills.

—REALTOR® Magazine