It’s 12/31/1985 All Over Again

Buying a home with a mortgage over $500k and under $1m? Selling a home? You both have tax implications.

I remember 12/31/85. It was the last day to close before TRA ’86 took effect. That law dramatically changed the way property was handled for federal income tax purposes mostly on commercial and multi-family transactions.. I remember having many closings in that last week. new Years Eve was a time to sleep. And now, it returns for residential real estate.

Buyer Issues

If you are in the process or are very close to pulling the trigger on a new home, close before 12/31/2017. Why? Simple. There is a very high chance that whatever tax bill comes out of Congress this month, there will be a provision to reduce the amount of mortgage interest that is deductible will be limited to principal balances of $500,000.

If you close in 2018 and you have taken out a $1m loan, half the interest you must pay on that loan would then NOT be deductible. It will not cost you dollar for dollar in federal income tax, but it is a significant amount.

Add that to the possibility that you will not be able to or be limited in your deduction of state and local tax, this could end up really hurting.

What can buyers do?

If you do mean to do this, get ready today. Drop everything and get anything that a mortgage lender will want, pay for an appraisal right away when you sign the agreement and just get the lender any stupid piece of paper they want.

Don’t bicker about the small things because it might cost you tens of thousands of dollars because you worried about a few hundred bucks.

Avoid loans that require multiple approvals like USDA and city or state bond programs. Go conventional or FHA.

Sellers Issues

If you have been living in the home for two full years and want to qualify for the deferral of up to $250k for single and $500k for married capital gain deduction, you MUST close in 17. Why? The discussion is that it will be changed to being in the home 5 straight years out of the last 8.

That means you would have to pay the capital gain now, not defer it. That means you would have less cash in your pocket and will need to borrow that much more on the next house. That adds up to multiple thousand.

What can sellers do?

Get a home inspector asap. Pay for it. Find out what is wrong. Price the house right. Don’t haggle over a few bucks. Listen to the professionals about what makes the house sell fast. It’s all about speed.

What can agents do?

Agents need to get title ordered ASAP. Once your buyer shows interest (or once you listed in CA), get it done.

Also, press homeowner association management companies to fill in anything that the lender wants with urgency. These companies have a horrible reputation of delays and fees. Just pay the rush fee.

What if they can’t get it done?

Close with the seller taking back a second wrap mortgage and refi after you close in 2018.

Get a loan wherever you can (friends, family, employers, crowd sharing) and refi in 18.

Ask for a lower price after the first. It will start happening in many markets because the value of the asset with the tax benefit will diminish in the eyes of all the buyers (except if you are in a stupid market).