The Tax Plan

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We’re sure by now the Trump administration’s potential tax reform proposal has caught your attention, but what does it all really mean? This potentially impactful tax plan could considerably shake up the real estate market. It’s definitely something to pay attention to if you’re a potential home owner or considering selling in the near future.  Both the House and the Senate have their owns bills, and we wanted to break down the differences in monthly payments and purchasing power for potential buyers should one of the bills pass.

To put this into perspective, if you were an individual making $250,000 and wanted to purchase a $1.25M home with 20% down the following would happen:

  • Monthly Payment
    –    Your net payments would go up by approximately $2,940.00 – $6,562.56 over the course of your first year depending on which bill passes.
  • Purchasing Power
    –    If the house bill passed, a buyer would need to change his down payment from $250,000 to $367,000 to have the same net monthly payment OR the price of a $1,250,000 home would have to come down to $1,083,000.
    –    If the Senate bill passed, a buyer would have to put down $319,000 vs. $250,000 OR the price of a home would have to come down to $1,181,000 vs. $1,250,000 for the net monthly payment to stay the same.

Confused? Let us run you through some math:

         Currently If House Bill Passes If Senate Bill Passes
Purchase Price $1,250,000 $1,250,000 $1,250,000
Down Payment (20%)      $250,0000      $250,0000      $250,0000
     Mortgage Amount      $1,000,000      $1,000,000      $1,000,000
Common Charges $1,000 $1,000 $1,000
State & Local Real Estate Tax $700 $700 $700
1st month mortgage payment  (30 year fixed at 3.75%) $4,631 $4,631 $4,631
     Principal Payment      $1,506.16      $1,506.16      $1,506.16
     Interest Payment      $3,125.00      $3,125.00      $3,125.00
Total Monthly Payment $6,331 $6,331 $6,331
Tax Bracket 35% 35% 35%
Total Deductions $3,825 $2,262.5 $3,125.00
Estimated Savings $1,338.75 $791.87 $1093.75
Estimated Net Monthly Payment $4,992.25 $5,539.13 $5,237.25

As it stands now a home owner can deduct 100% of their State and Local Taxes along with $1,000,000 in interest payments on their mortgage.  In the current state of the market the monthly deductions on our example above would be $3,825 ($700 in State & Local R.E. Tax & $3,125 in interest payments).  For example, if you are in the $200K-$500K tax bracket (35%) your current estimated savings would be $1,338.75 ($3,825 x 35%).  Your estimated net monthly payment (Monthly Payment – Estimated Savings) would be $4,992.25.

With the proposed House bill only $500K in mortgage amount would be deductible and up to $10,000 in state and local taxes would be allowed to be deducted. As a result your net monthly payment in the same scenario would be $5,539.13 (10.95% higher).

With the proposed Senate bill you would still be able to deduct the interest on $1,000,000 of your mortgage but no local or state taxes would be deductible. As a result, your net monthly payment in the same scenario would be $5,237.25 (4.90% higher).

This bill is currently being negotiated and there are even more factors to consider than what’s listed above. It’s not all bad news, as the standard deduction in both bills is being proposed to be doubled. We are hearing speculators say these bills won’t pass. Whether it passes or not, it’s an historic moment and something not to be taken lightly while making your real estate investment decisions.

Still confused? Please don’t hesitate to reach out should you want any further clarification and have a very happy Thanksgiving!

PS – We’d like to give a special thanks to Elise Leve of Citizens Bank for her help with our analysis.

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On November 21, 2017

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