Reflecting promises made on the campaign trail, President Trump’s tax reform proposal appears to be an effort to reduce tax burdens for Americans as well as simplify the nation’s tax structure. Based on the outline presented this week, we now have a clearer picture of the administration’s primary goals for tax reform, but those goals will need to be formalized in detailed legislation. What is less clear is how additional revenue will be generated in order to offset the proposed decrease in federal tax rates. Because of the need to establish this fiscal balance, the road to achieve Trump’s proposals will be long and rocky, and will require the hard work and cooperation of both sides of the aisle.
This proposal has also raised many questions about what Trump’s plan would mean for the housing market. Due to the current lack of detail in his proposed outline, it is difficult to accurately predict the impact a tax system overhaul of this magnitude would have on the economy. However, there is potential for both negative and positive repercussions for homeowners and real estate investors, should Trump’s tax plan make its way through Congress.
Assuming Congress can work together toward these goals, there are several possible upsides for the housing industry. Generally speaking, tax reductions typically result in an uptick in demand for housing. For example, Trump’s proposal to increase standard deductions will help lessen individual tax burdens, resulting in more money in consumer pockets, which can translate into more people being able to purchase homes. Likewise, if companies are able to pay less in taxes, they will experience increased capacity to access more capital, which can be reinvested into growth. That expansion can trickle down to vendors and employees, ultimately increasing the likelihood of augmented real estate investment, which will boost local economies.
On the negative side, there may be adverse consequences from the elimination of deductions for state and local taxes and the higher threshold for taking the mortgage interest tax deduction. If these changes make it into the final tax reform bill, many homeowners who have counted on these deductions in the past will no longer be able to utilize them as tools to offset their federal tax burden. Some analysts believe this could result in decreased demand for homes, which would adversely impact home values.
It is also worth noting that Trump’s tax reform plan appears to eliminate the 1031 exchange, which is regularly relied on by real estate investors to defer tax on real estate investment gains. Eliminating the 1031 exchange will likely cool real estate investment, which would negatively impact the broader economy.
When comparing the positive and negatives of the plan, the primary question boils down to this: Will increasing the standard deduction offset the loss of state and local tax and mortgage interest deductions? Ultimately, Trump’s tax plan will need to be formalized in detailed legislation and then pushed further down the field before a more accurate answer becomes clear. In the meantime, analysts and investors will need to continue watching and waiting as the Trump Administration works to accomplish its stated tax reform goals.