Four ways the new legislation could impact homebuyers and homebuilder businesses.

The end of 2017 saw the passage of the new Tax Cuts and Jobs Act. From changes in the individual tax rates and deductions to the lowering of corporate rates, there are plenty of opinions about what affects the new legislation will have on the economy and the average taxpayer. One of the biggest impacts may be felt in the housing markets, which could lead to challenges going forward in 2018. We wanted to look at some of the changes and the potential impact they may have.

Here are some of the major elements that could impact housing and construction from

  • State and local taxes income tax and property tax deduction – Capped at $10,000
  • Standard deduction – Nearly doubled from $6,500 to $12,000 for individuals; and $12,000 to $24,000 for families
  • Private-activity bonds (PAB) – Retained $100 per capita/$305 million small state minimum
  • Mortgage-interest deduction – Reduced from $1 million to $750,000 in loans on property value
  • Low-income housing tax credit (LIHTC) basis boost – Retains 30% basis boost for projects in distressed areas
  • Estate tax – 40% on value exceeding $10 million
  • Corporate tax rate – Top corporate rate of 21%, down from 35%
  • 4 percent LIHTC – $3 to $4 billion a year (retained)
  • Non-historic rehabilitation tax credit – Repealed the 10% credit for non-residential buildings placed in service before 1936.

Historic rehabilitation tax credit (HTC) – 20% credit retained, but claimed over 5 years

4 areas where impacts of the new tax law are likely to be felt:

1.   Changes in mortgage-interest and property tax deductions.

Those in the housing and homebuilding industry are most concerned about the changes relating to mortgage-interest and property tax deductions. Critics of the bill believe capping these amounts ($750,000 for mortgage-interest; $10,000 for state and local income and property taxes) could hurt homeowners in cities with expensive housing markets and high property taxes. New homebuyers in the Northeast, West Coast, South Florida, and large Midwestern cities may have even more trouble affording a house, not to mention the high property taxes. It might also drive home prices down, which could hurt sellers. “Current house prices reflect current tax breaks … If those tax breaks are scaled back, as they are in the new tax law, then house prices will suffer,” according to a Washington Post article.

There are a few things to keep in mind regarding the changes, however, especially for existing homeowners. “Existing homeowners will be grandfathered into the previous deduction limit. So the new cut is expected to affect only about 1.3% of new mortgages,” according to

At the same time, since the standard deduction is being almost doubled, many homeowners could choose to take that deduction rather than itemize. This might be especially true in areas where home prices are lower. “For many couples, the increase in the standard deduction will cancel out the benefit of itemizing, since their mortgage interest and $10,000 SALT [state and local tax] deduction combined, won’t exceed $24,000,” according to a Forbes article.

2.   Low-Income Housing Tax Credit (LIHTC) and Historic Tax Credit.

These changes affect those involved in low-income housing construction and home renovations. According to Curbed, “The bill retains the 4% LIHTC and the Historic Tax Credit … The 4% LIHTC funds a third of all affordable housing construction, while the HTC has been used to fund renovations to more than 40,000 historic structures since 1981.”

3.   Private-activity bond financing.

One benefit for the construction industry may be in the area of PABs. According to Construction Dive, “The public construction sector will benefit from the uninterrupted flow of private-activity bond financing, and both the contractors who are structured as pass-through entities and C Corporations will see significant tax relief.”

PABs effect mainly building construction. It allows private companies, working on public projects, to borrow money at the same tax-free rate as government agencies.

“The retention of tax-free status for PABs, as well as favorable treatment of energy-related exploration and tax credits have some segments of the industry breathing a sigh of relief,” according to the same Construction Drive article.

4.   Lower tax rates for corporations.

One of the most significant measures in the new tax bill was the lowering of corporate tax rates. The new top rate is now 21%, down from 35%. According to Construction Dive, “That’s a break for everyone except those low-earners that currently pay 15%. But many construction companies are pass-through entities, a structure that allows owners to include business profits on their personal tax returns. The new tax reform measure gives those individuals a 20% break on that income.”

There is still much to understand about the new tax law, and it may take time before the real impact is felt in the housing market and homebuilder industry. No Boundaries CPA is here to help your business navigate this changing landscape, with expert advice and business know-how. If you want to find out how to minimize – and even capitalize – on the recent changes, contact us today.

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