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How The New Tax Laws Affect Homeownership in Nashville, TN

Posted by Scott Layson on January 18, 2018
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new tax laws nashville tnFirst, I should probably get the disclaimer out of the way…..I am not a tax accountant and you should ultimately talk with your accountant before making any tax related decisions.

This guide is just meant to provide the foundation for how the new tax laws could affect you if you own or plan on buying a home. Let’s take a look at the major provisions to see how they might impact you.

1. Capital Gains Exclusion on Sale of Primary Residence

Initial Proposal: Under the initial proposal, homeowners would need to have lived in their homes for at least 5 out of the last 8 years to qualify for this exemption. This would have been a huge change from the original tax law which stated that a homeowner must live in their house for at least 2 out of the last 5 years in order to avoid paying capital gains taxes if they sell the house.

New Tax Law: Lawmakers left the provision unchanged that a homeowner must live in the primary residence at least 2 out of the last 5 years instead of raising it to 5 out of the last 8 years.

Impact on Nashville Real Estate:

Level: None

2. Mortgage Interest Deduction

Initial Proposal: The former tax code allowed for a mortgage interest deduction on loans up to $1,000,000(married filing jointly) to $500,000(single). The new tax proposal looked to reduce the amount of mortgage interest deduction that a person could claim from their primary home loan to $500,000 & $250,000 respectively.

New Tax Law: Revised the limit of mortgage interest deduction to $750,000 (married filing jointly) and $375,000 (single) for any new home loans acquired after 12/14/17. If you had an existing loan before 12/15/2017, then it is grandfathered into the old tax code.

Impact on Nashville Real Estate:

Level: Low – Medium

The most recent home sales report report showed that the average home price in Davidson County was $313,000 while Williamson County had an average of $439,900. This means that homeowners who are single or married and filing separately are likely to be most affected if they exceed the new $375,000 limit.

Over the past year homeowners with mortgages of $750,000+ made up less than 10% of all transactions in metro Nashville. So while there is a percentage who will be affected by this, it’s fair to assume that the vast majority of homeowners in the area will not be impacted……with maybe one exception.

Nashville is already struggling with being able to provide enough affordable housing for the amount of demand that it is experiencing. There is a possibility that the new $750,000 limit could put downward pressure on the lower priced inventory of homes as more and more people try to purchase below the new tax deduction threshold. This could create a domino effect that leads to even less inventory and ultimately higher prices for homes in this range.

3. State and Local Taxes (SALT)

Initial Proposal: The elimination of the state and local tax deduction, including property taxes.

New Tax Law: Instead of an unlimited amount under the old low, the new regulation allows you to itemize up to $10,000 for the total of state and local property taxes, income & sales taxes.

Impact on Nashville Real Estate:

Level: Low

First, it’s important to note that this will really only affect those people who itemize their taxes (which is only about 30% of the population) and those in high taxed states. Luckily, Tennessee does not fall into that category.

So what impact could this have on Nashville’s real estate market? There’s a chance we could see more people flee high taxed states for states like Tennessee that offer some tax relief. This could hypothetically put more strain on our housing supply and once again drive up home prices.

Conclusion

Overall, it looks like the new tax law will have have some impact on Nashville’s housing market, but not near as much as cities located in high tax states. If our thinking is correct, then current homeowners below $750,000 may see a larger gain in home values than usual and those above $750,000 may flatten out just slightly. Also, the buying power for home buyers below the $750,000 price point may diminish slightly if the housing supply in this range decreases even more due to the new regulations.

 

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