Trump Era Tax Cuts Are Expiring: 3 Ways This Would Impact the Housing Market

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The Trump administration introduced a series of tax cuts that had far-reaching implications for various sectors of the economy, including the housing market. As we approach the expiration of some of these tax cuts, it’s crucial to examine how these changes may influence the real estate landscape and the housing market.

Reduced Mortgage Interest Deductions

One of the hallmark changes introduced during the Trump era was the increase in the standard deduction for taxpayers. This change significantly reduced the number of people who itemized deductions, affecting homeowners who traditionally benefited from deducting mortgage interest payments.

According to the Tax Foundation, under the Tax Cuts and Jobs Act (TCJA) in 2017, there were several significant changes to the individual income tax. These changes included a nearly doubled standard deduction, new limitations on itemized deductions, reduced income tax rates, and reforms to several other provisions.

With the expiration of these tax cuts, the standard deduction may revert to previous levels or undergo revisions. This could result in fewer taxpayers itemizing their deductions, reducing the incentive for homeownership. Overall, prospective homebuyers might think twice about purchasing a home if they can no longer take advantage of the mortgage interest deduction, which could slow down the housing market’s growth.

Cap on State and Local Tax (SALT) Deductions

Another significant change introduced by the TCJA was imposing a cap on SALT deductions. Taxpayers were limited in the amount they could deduct on their federal returns for state and local taxes, including property taxes.

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The American Bar Association said two of the significant changes resulting from the TCJA on the local level were the state and local tax (SALT) deduction cap of $10,000 and the mortgage interest deduction.

In high-tax states such as California, New York, and New Jersey, a substantial percentage of homeowners were negatively impacted by the SALT deduction cap. The SALT cap’s expiration could relieve homeowners in high-tax states, making homeownership more appealing. This could increase demand in these areas, potentially driving up property prices. However, it’s essential to note that the impact would be region-specific, benefiting states with higher taxes and potentially exacerbating disparities between low-tax and high-tax states regarding housing affordability. The expiration of these Trump era tax cuts will also affect personal income tax rates, too.

Effects on Real Estate Industry Incentives

The Trump era tax cuts included provisions that directly affected the real estate industry. This included introducing the Qualified Opportunity Zone (QOZ) program and changes to depreciation rules, which incentivized real estate development and investment in certain areas.

The IRS indicated that thousands of low-income communities in all 50 states, the District of Columbia, and five U.S. territories are designated Qualified Opportunity Zones (QOZ). The QOZ program provides tax incentives for investments in economically distressed areas, potentially leading to a surge in real estate development in these zones.

As these tax incentives expire or undergo revisions, there may be a slowdown in real estate development and investment, especially in QOZs. This could affect the supply of new homes in specific areas, potentially leading to increased competition among buyers and impacting home prices.

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