Buying and Renting in the New Tax-World Economy
With changes in the new tax plan passed by Congress, many who own their home or have investment properties are carefully reading the provisions to see how they will affect their finances. Here’s a quick synopsis of points to ponder:
If set up as an LLC, or limited liability corporation, being an independent landlord becomes more appealing. The bill provides a 20 percent deduction for income earned from pass-through entities such as an LLC or S-Corporation, says Ryan Coon. Coon is co-founder and CEO of Rentalutions, based in Chicago, which has developed software for independent landlords to use to make the rental process smoother and more efficient. The LLC appeals for other reasons. It protects an owner from different liabilities and risks they may encounter. If someone slips and falls on your snowy sidewalk and sues, for example, it’s the LLC that takes the hit rather than the actual owner’s personal assets. But the main benefit now is that with this new credit an investor or owner pays tax on only 80 percent of their income. How much does it cost to place a property in an LLC? It varies by state. In Illinois where Coon lives, it costs about $150 to set it up and another $75 per year to renew. The downside of an LLC is that some lenders won’t loan funds to an LLC and prefer to work with individuals or other corporate entities, he says.
It could make it tougher to own expensive properties, whether it’s a property used as a residence or investment property. The cap on mortgage interest at $750,000 means that the home owner will have to pay higher income taxes. This is more likely to affect houses of home owners and investors in the pricier coastal markets—New York City and surrounding areas, Boston and other parts of Massachusetts, parts of Florida, Los Angeles and San Francisco, says Coon. Of course, there are many expensive homes throughout the country as well, including in the Heartland and Texas. However, economist Richard Green, Director of the University of Southern California’s Lusk Center for Real Estate in Los Angeles, thinks this will have almost no effect on home ownership. “It might mean that prices go up less than they otherwise would have but I don’t anticipate a decline,” he says. In countries without the availability of a mortgage deduction, what it’s meant is that home owners tend to pay off a mortgage faster, he says.
The $10,000 cap on local and state property taxes may temporarily send certain property values down or make those with higher price tags less appealing to buyers, Coon suggests. Homes with higher taxes may be less appealing to new home buyers who rely on deductions to make them more affordable. As a result, these buyers may be less likely to pay the same prices for them. The domino effect could also result in lower property value assessments. But eventually there could be more demand for these homes with lower assessments and real estate taxes—and over time that could send the home values up. Coon, for one, thinks there may be a lot of “wait and see” in the housing market as well as more landlords looking to expand their investment portfolio with listings that will become less costly than they formerly were. Green doesn’t think this change will have any significant influence. The bigger issue, he says, is that housing, especially on each coast, already is expensive. “I don’t think it will move prices down; they just may not go up as rapidly as they have,” he says.
Investment rentals may increase in value. If some shed their homes due to the changes and uncertainty, rentals may become more appealing, Coon says. In fact, millennials who haven’t yet bought may continue to delay getting into the housing market. And baby boomers selling to downsize may also decide not to buy again but rent. The upshot of these cohorts and others may make it easier for landlords to raise rents. Another reason for the possible rental boom is that after the real estate bubble burst in 2008, there’s no longer a stigma in renting. Coon thinks that increased interest could also be a boon for renters. Many landlords may think they have to increase their level of service and number of amenities they offer to compete with other landlords and available inventory to attract the larger potential pool of renters. “The expectation of consumers will definitely be higher,” he says. Better service could translate into different results: 1) prompter attention on a landlord’s part to fix whatever needs fixing; 2) maybe the possibility that renters won’t have to repaint or put their units back to the exact way they were when they rented as long as they leave them in nice condition; 3) more options to upgrade to better appliances; and 4) more flexibility in longer-term leases than just for a year or two. Here, too, however, Green thinks the effects will be marginal.
The bottom line is that it may take months or even a year or two to see how all these changes play out in the market, and in different regions of the country with different inventory and price points. In the very worse-case scenario, the overall changes in the tax bill that are bad for the economy eventually may affect the housing market, too, Green says.
The original article can be found here.