by Fuquan Bilal, Director of NNN Capital Fund
A new change to the capital gains tax rule could have a big impact on the U.S. real estate market.
Not much noise has been made about this ‘small’ tweak to the tax code yet. At least not compared to other changes in the new tax bill. Yet, it could have a very big influence on the industry, in a variety of ways.
Manipulating the Capital Gains Tax Break
Until now US homeowners could be exempt from up to $500,000 in capital gains on the sale of their homes, providing they lived there for at least 2 of the previous 5 years. Under the new tax plan homeowners would have to stay put for 5 years in order to get the break.
This could bring in mountains of cash for the government in the next few years from American homeowners who planned to sell, or who aren’t aware of the change. Yet, according to projections from Zillow, it could hit some in high value areas with $70,000 or more in additional taxes on the sale of their personal residences.
Note that this doesn’t change the rules for real estate investors.
Slowing the Flow of Home Sales
With homeowners needing to stay in their homes for 5 instead of 2 years, we could see the time many spend in their homes more than double. That means far fewer real estate transactions for real estate agents and the economy. In turn that could mean far more limited inventory becoming available for home buyers.
In an already tight market, that is likely to push up property prices further as buyers compete even more fiercely for the few homes that do become available.
End of Year Listing Surge
With the new twist on the capital gains tax rule expected to kick in on January 1st, 2018, we could see a surge in homes being listed for sale in December. Home sellers need to beat the tax deadline, or face losing tens of thousands of dollars in proceeds from the sale, or more. This could be an opportune time for investors to capitalize on motivated sellers and competing inventory, and create win-win solutions, providing they have the capital to close in a matter of days.
Better Performing Mortgage Notes
With homeowners and borrowers likely to stay in homes for much longer periods, mortgage note performance may improve as well. This is especially true for more mature home loans with higher interest rates. Those who have been on the brink of default or foreclosure, may also work extra hard to catch up, and retain those homes, instead of selling and taking an even larger and longer lasting financial hit.
Find out more about investing in secured debt and real estate, go to NNG Capital Fund.