New Tax Implications Favorable for Investors

The following article was presented to ARMLS members on 11/15/17, with tax debates underway and changes likely, I thought it was worth sharing. As it stands the changes look good for Arizona,  investors and renters.


There have been numerous articles written over the past week about the new tax implications. In his daily observations from November 6th, Michael Orr of the Cromford Report shared his take on the tax adjustment.

“The Mortgage Interest Deduction is not as important as many in the housing industry believe. It only comes into play for taxpayers who itemize their deductions and for many people the standard deduction is already larger than the total of their itemized deductions. With the proposed tax changes under review in 2017, the standard deduction will increase while many other deductions will be reduced. This will mean the Mortgage Interest Deduction will become irrelevant except to a very small percentage of home owners in Arizona. Only filers with incomes well over $200,000 are likely to nd it worthwhile to itemize their deductions. Needless to say, this is a lot higher than the typical income level to be found across Greater Phoenix.”

“The limit on the size of the mortgage for which mortgage interest can be deducted is proposed to fall from $1,000,000 to $500,000 and property tax deductions will be limited to $10,000. In California these limits may look rather low, but in Arizona there are few people who will be affected. This is because our property taxes are much lower than California and our average mortgage is much smaller too.”

“The net effect of the proposed tax changes will be to lessen the tax advantages of home ownership versus home rental. This could divert some demand away from homes for sale towards homes for rent. Neither type of home is easy to find in affordable form in the Phoenix area right now, though expensive homes are easy to find for both rent and purchase. It also means the tax proposals will be unpopular with real estate agents, who much prefer people to buy rather than rent. This is confirmed by the strong opposition to the tax reforms voiced by the National Association of REALTORS®”

“Another thing that agents will dislike is the new incentive created for high end homeowners not to sell their home. Existing mortgages will have their interest deductibility preserved but any new mortgage will be under the new rules. The national mobility is rather low at the moment, so this tax change will probably reduce mobility further, especially at the high end. On the other hand, people involved in re-modelling and renovating will be pleased about the changes, as owners decide to stay with their existing mortgage and update their home instead.”

“From a builder’s perspective, they too prefer incentives to buy rather than rent, so most are in opposition to the tax proposals. However, it will be high end builders like Toll Brothers and those with a greater exposure to expensive markets on the coast who will be most negatively affected. The Arizona market will feel very minor effects in comparison and the low and mid-range demand for new homes is likely to remain intact.”

“Those involved in rentals will love the changes because rental demand will get a boost. Doubling the standard deduction will give most lers the tax benefit of owning a home without the bother of having to a purchase one. The likely increase to their take-home pay will probably make it easier for tenants to pay their rent on time and agree to the rent increases that landlords love to impose. The tax changes are therefore friendly to landlords and real estate investors.”

Numbers from Maricopa County public records in 2017 echo these sentiments:

90% of the homes purchased in Maricopa County are less than $482,000 77% of all homes purchased had a mortgage
Less than 3% of the homes purchased had a mortgage greater than $500,000

My personal sentiments align with Joseph Callaway in a recent azcentral article, “It has been a long time since we had a buyer say that they were buying a home for the tax deduction on interest,” he said. “If tax reforms bring more prosperity to people, then home ownership and demand will go up.” And I might add, a tax change that negatively impacts California might bring positive economic gains to Arizona.

It should be noted the tax-reform bill hasn’t passed yet, and more changes will come as Congress sifts through the proposal. As is most often the case, it’s difficult to anticipate the true ramifications of changes within the tax code, and at this early stage, we’re only guessing.

Reproduces with permission courtesy of ARMLS® COPYRIGHT 2017