Senate Takes a Stab at Tax Reform

I’m not trying to make a political statement or weigh in on this article. Politics and religion should be discussed at a political forum or among friends in agreement. I don’t agree with the following Tax Plan because of it’s immediate and long range negative effects it has on real estate and home ownership. Any plan that effects home ownership and the “American Dream” negatively is hard to comprehend. Read this eye opening article below and see where you stand. I know you can’t make every American happy. But when you hurt the large majority it only makes life more difficult and our Country less likeable.

Earlier this week the Senate jumped into the fray, releasing its own proposal for tax reform. The Senate’s proposal  creates significant headwinds for homeowners and homebuyers, while providing only a temporary cut for middle class homeowners.

What Stays the Same?

Like the House bill, the Senate chose to change the definition for capital gains so that a home seller must have lived in their home for at least five of the prior 8 years. This change would affect 12% to 22% of home sellers, locking in some inventory and potentially changing the trade-up purchase process.

The Senate also proposed to eliminate personal exemptions as the House did, but they chose to increase the child credit to $2000 per child. This latter change is more generous than the House’s $1,600 credit per child and $300 for each parent.

Pouring SALT in the Wound

Unlike the House bill, the Senate chose to eliminate all state and local taxes (SALT) including state and local income and sales taxes as well as state and local real estate taxes. This change will make it more difficult for homeowners to itemize their mortgage interest and when they do, they will face a much lower benefit from home ownership. In a perverse way, only those who can afford very expensive homes will be able to benefit from the real estate provisions of the tax code.

Tax Reform - Standard Deduction vs Itemize on a Home Purchase in Illinois

The generous $24,000 standard deduction for couples who are renter or owners provides little support for renters who move to ownership nor does it guarantee that tax cuts today will be utilized to boost housing affordability in the future. Worse, when this provision expires in 8 years, both groups will be worse off.

Time Does Not Heal All Wounds

Most forecasts are for home prices and mortgage rates to rise in the coming years. The chart below shows how the proposals from the House and Senate compare with current law. The orange bars depict the difference between the Senate proposal and current law. A home buying family of four with an income of $100,000 or less would see a gain, while upper-middle income buyers would face a tax hike. However, in 5 years1 that tax cut would disappear for nearly all middle-income home buyers as mortgage rates and prices rise (red bars). Finally, after 8 years, the tax cuts and enhanced standard deduction both expire letting virtually no buyers benefit under the plan (dark blue bars).

Chart Comparing Tax Plans for a Family of Four Over Time: Current vs Proposed

The Senate’s proposal reflects many new changes, but retains many facets of the House proposal. While some changes help middle class homeowners today, it appears that the changes quickly wear out and are worse in the future.

http://franksacco.com


Some Home Renovations Can Raise Tax Bills

Home owners tackling a remodeling project may want to consider how their renovations could impact what they pay on their taxes. Renovations can increase a home’s assessed value, and assessed value is used to determine the property tax owners pay.

The improvements that can increase a property’s reassessment can vary considerably by location. Home owners may be wise to ask their city in advance how a certain improvement might impact their home’s assessed value, if they want to avoid surprises later on.

In general, however, additions and increasing living space tend to increase an owners’ property taxes. Also, finishing space that the owner already has, such as in the attic, garage, or basement, also tend to increase the property tax bill.

“Anything that increases the square footage of the living space is likely to increase the value of the home, and therefore the assessed value,” says Tom Shaer, deputy assessor for communications with the Cook County Assessor’s Office.

Also, large renovations – such as adding a bathroom – likely will prompt a reassessment of a home too. That’s because an “additional bathroom allows more people to live in the house,” therefore increasing its value, says Pete Sepp, president of the National Taxpayers Union, a pro-taxpayer lobbying group.

Kitchen renovations can be one gray area, says Michael Kapp, public information officer for the Los Angeles County assessor’s office.

“If they’re replacing countertops and not extending them, it would probably not [trigger a reassessment],” Kapp says. “If they add additional cabinets or move a wall, for example, that would trigger reassessment,” even if the square footage does not increase.

Some owners may be surprised at what will trigger a reassessment. For example, adding a garden shed could potentially trigger a reassessment, Sepp says. Also, in-ground pools, a very large deck, or even re-grading the lot to improve its drainage could potentially increase the property tax bill too.

Generally when a remodeling permit is pulled it can trigger reassessment. If you elect to remodel without necessary permits it may cost you when you sell the home. An appraiser can identify remodeling in most situations. Difference in square footage, plumbing fixtures, electrical systems are just a few of many remodeling items that require building permits. Better to play by the rules than pay the penalties later.

Source: Home Renovations That Add Value

www.franksacco.com

What you should know

  • Homeowners should be aware of these tax breaks that they may be eligible to receive.
  • Mortgage interest: Homeowners are generally entitled to reduce their taxable income bythe amount of mortgage interest they pay, as long as they itemize deductions on their tax returns.
  • Private mortgage insurance: Homeowners who are paying PMI likely will be able to fully deduct the amount, as long as their adjusted gross income is $100,000 or less ($50,000 for married taxpayers filing separately). Borrowers with incomes above $100,000 may qualify for a partial deduction.
  • Energy-efficient home improvements: If windows, doors, or skylights that meet the requirements of the federal Energy Star program were installed in 2011, homeowners can get a tax credit equal to 10 percent of the product’s costs.
  • Points: The charges a borrower paid in points to get a mortgage are generally deductible if it was a first mortgage on the property. In the case of a refinance loan, all or some of the point charges might be deductible, but it gets complicated.
  • Property taxes: The amount paid in property taxes is deductible as long as it is based on the assessed value of the property. If the mortgage company collects money for property taxes, the amount actually paid should be on the 1098 form lenders send out each January.