The Domaine Digest - ๐Ÿ’ฐ Tax Edition 2017 ๐Ÿ’ธ

As you've likely noticed, some major changes have just been made to the U.S. tax code--in fact, the largest overhaul of the tax code in a generation--and you may be wondering just what it all means for you.  While there has been no shortage of news coverage on the topic, we here at Domaine HQ figured we'd weigh in with our thoughts on how it may affect the things that matter the most to our clients--namely, your homes and your real estate investments.

One major note is that this tax bill impacts real estate ownership relative to the state you happen to live in and own real estate in.  And in this way, it is important to note that with these changes, it is better to own real estate in Tennessee than, say, California (which should only serve to continue a recent trend we've seen first hand as wave after wave of clients are disembarking from coastal and high-tax states such as California, Washington, New York, and Illinois).

So, first things first: you've made a good decision to call Tennessee (and Nashville) home!  It also means that if you've been on the edge of moving to Nashville, now is as good a time as any (and give us a shout so we can help!).

So, let's take a look at how this may impact your real estate ownership:

Mortage Interest Deductions: First, one of the most obvious changes to the tax code, from a real estate perspective, is the reduction in the cap on mortgage interest deduction--the bill caps mortgage interest deductions for primary and secondary residences at $750,000 (down from $1 million today).  This will impact all you luxury or second homeowners as you will lose $350,000 worth of interest deductions each year.  However, if your mortgage is less than $750,000, or if you don't itemize your deductions than this change will have no impact on you.  Many of our clients will see no changes here, and again, the relative affordability of Nashville will continue to be a draw for people living in high cost-of-living states where even the most basic homes can cost upwards of $1M. 

Local Tax Deductions : Another twist in the storyline, particularly of note to us Tennesseeans, is that this bill sets a cap on state and local tax deductions, only allowing for a maximum deduction of $10,000 on your federal return.  Since Tennessee has no state income tax, this is essentially a net-zero for Tennessee tax filers but could be a severe penalty to those living in high-tax states such as California.  Get ready to see more California plates flooding the streets of Nashville in the near future!

Capital Gains on Real Estate: One change that was in the original draft of the bill that could have been very impactful to homeowners was the proposed tenure requirements that would have obligated owners to occupy a primary residence for five of the past eight years to qualify for tax exemptions, thereby potentially exposing them to tens of thousands in new capital gains taxes.  Ouch!

Leading up to a final draft of the bill, however, lobbyists successfully saved the current requirements, by which individual sellers arenโ€™t responsible for taxes on the first $250,000 in profit from a sale โ€” provided itโ€™s a primary residence, occupied for two of the past five years (the capital gains exclusion rises to $500,000 for married couples filing jointly).  In short, nothing to see here, folks!

Pass-Through Income: As for the real estate industry itself, at least nationally, it's a mixed bag.  While some of these changes may impact the buyers and sellers of real estate, the bill is likely to be a positive for real estate business holders, in particular brokers and developers, through changes to so-called "pass-through" entities, like S-corporations and limited liability corporations (LLCs). Under the new tax code, pass-throughs, often used by brokerages and other real estate entities, would be locked into a 20 percent deduction โ€” a substantial savings given that pass-through owners currently pay taxes on these profits through the individual income tax rate.  This same logic applies to any small business owner who holds his or her entities as S-Corps or LLCs--and I can think of many clients in music/entertainment, retail, design, and creative services who will benefit from this deduction.

All in all, regardless of what you might think of the bill in terms of its fairness or impact on the country overall, you should be able to go to sleep tonight knowing that it will not have a significant impact on your real estate holdings here in Tennessee, nor should it create much of a ripple here in our already healthy market.  If you have any questions about real estate, real estate investing, or real estate ownership, don't hesitate to give us a call or shoot us a message.  And if you live in California or New York, CALL ME!  I'll find you a great house here in Nashville.