THRiVE Real Estate - Keeping our agents informed on the latest laws, inviting the community into our THRiVE community room to learn how the new tax laws will affect their property values, etc!

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For my many friends, family, and clients who are wondering how the new tax bill, officially the Tax Cuts and Jobs Act, will affect their home values, here is a brief (sorry, that is a lie - this is not brief at all!) summary of the particulars, followed by a few notes on how it may affect many of the self-employed in our industry. My subjective opinions follow my initials SP. At the end, you will find links, tables, and other fun stuff for those working on their Nerdy badge. PLEASE NOTE: This is an opinion piece. I am not a Tax Accountant, or a CPA, or a Lawyer, or even a professional Talking Head. Consult one of those professions if you wish to make actual financial decisions based on subjective opinions like the ones below... The following sources were utilized, and when possible will be cited: Investopedia (Inv), NAR, The Tax Policy Center (TPC), and the Tax Foundation (TF). SUMMARY The Tax Bill contains a number of changes that at times appear to cancel one another. Personal income tax rates were generally lowered across the board (six of the seven brackets were lowered), yet most of the bracket income levels were lowered, meaning it is easier to move into a higher tax bracket. Mortgage interest deductions (MID) were capped at a lower amount, but the standard deduction was roughly doubled. State and local tax deductions (SALT) were also capped, but the corporate tax rate as well as the “pass through” used by many were improved. SO WHAT’S THE IMPACT? What is the overall effect of the Tax Bill? There is a lot of debate going on right now, and of course no definitive answer. The majority of organizations, left and right, who have analyzed the bill believe it will increase our national deficit, which is certainly not a good thing in the long term. Others point to the Laffer Curve, which suggests that as tax rates are lowered, business activity, income, capital gains, etc. increase, so there will be no or relatively little impact on federal tax revenue thanks to increased economic output. (In discussions with others, you will most likely hear terms like “trickle-down” and “Laffer Curve” so I have included a link for each at the end of this post.) Despite NAR’s histrionics, I don’t see this impacting real estate much at all. It may increase economic activity as a whole, which would benefit all of us. I certainly hope that is the result. It will take years to truly gauge. (Note: Most of the individual benefits, e.g. lowered tax rates, end in 2025. “The expiration date allows the Senate to comply with “reconciliation” rules that block Democratic filibuster… Republican congressional leaders have signaled that individual tax cuts would be extended at a later time.” (INV) Will that happen? History is not on our side with this one, but we can hope! BILLS EFFECT ON REAL ESTATE • Increases the standard deduction to $12,000 for single filers, $18,000 for heads of household, and $24,000 for joint filers in 2018 (compared to $6,500, $9,550, and $13,000 respectively under current law). (TF) • Eliminates the personal exemption. ($4150 in 2018 were it still allowed.) (TF) SP – The personal exemption basically rewarded people with more children. For instance, previously joint filers with no children would get a standard deduction of $13,000, plus 2 personal exemptions (husband & wife) equaling $8300, for a grand total of $21,300. Under the new Tax Bill they receive only the increased standard deduction of $24,000, but that works out better. On the other hand, joint filers with 2 children used to get a standard deduction of $13,000 plus 4 personal exemptions equaling $16,600, for a grand total of $29,600. In the new Tax Bill they will receive only the increased standard deduction of $24,000. That’s not as good. To make matters more interesting, (gotta love the tax code!), there also exists a “child tax credit” which is different from the old personal exemption. That does still exist - I know, don’t try and figure it out. In fact, that credit has been increased from $1000 to $2000. So… if you still have your calculator out you can rework all of the above math again and see that the deal that was worse is still worse, but not as worse as before. (See how much fun this is!) • Reduces limit on deductible mortgage debt to $750,000 for new loans taken out after 12/14/17. Current loans up to $1 million are grandfathered. (NAR) • Homeowners may refinance mortgage debts existing on 12/14/17 up to $1 million and still deduct the interest, so long as the new loan does not exceed the amount refinanced. (NAR) • Repeals deduction for interest paid on home equity debt. (NAR) • Interest is still deductible on home equity loans if proceeds are used to substantially improve the residence.(NAR) • Interest remains deductible on second homes, but subject to total limit. (NAR) • Exclusion of gain on sale of a principal residence • The final bill retains current law. SP – If your residential purchase home loan, for any transaction closing after 12/14/17, is greater than $750,000, you will not be able to deduct interest on that part of the loan which is above the limit. This affects home buyers with home loans between $750,000 and $1,000,000. Though this represents a significantly higher portion of buyers in our local market, on a national level if affects very few. The market for homes above $850,000 or so may be impacted by this Tax Bill. Someone who would have purchased a home using a $1,000,000 loan under the previous cap, will pay approximately $6000 more in taxes per year due to the new cap. This may or may not be offset by the increase in the standard deduction (see above), and decrease in personal tax rates. • Limits the state and local tax deduction (SALT) to a combined $10,000 for income, sales, and property taxes. (TF) SP – The limit on SALT predominately hurts states with very high sales and property tax rates e.g. California, New York, New Jersey, and Illinois. (The commonality of their political persuasion I will leave to you…) An observation some may dislike: a national policy on taxes does not have to answer for individual states’ inability to keep their financial house in order. (Of course, those national policy makers most definitely SHOULD answer for their own inability to keep their financial house in order, but that’s a different post.) • Retains the charitable contribution deduction. (TF) • Deduction for medical expenses. (NAR) • Final bill follows the Senate bill and retains the deduction for medical expenses (including decreasing the 7.5% floor for 2018). • Deduction for casualty losses. (NAR) • Final bill provides a deduction only if a loss is attributable to a presidentially-declared disaster. • Student Loan Interest Deduction (NAR) • The House bill repealed the deduction, but the final bill retains it. • Moving Expenses (NAR) • Final bill repeals moving expense deduction and exclusion, except for members of the Armed Forces. SP – Why are deductions important? (Other than the fact they are deductions, of course.) Well, when the Tax Bill raises the standard deduction and lowers the deductions one can itemize, like mortgage interest, state & local taxes, moving expenses, etc., it becomes more likely that tax filers will simply use the standard deduction. Actually, “most Americans (70 percent) use the standard deduction because it is larger than the value of the deductions they can itemize.” (TPC) Okay, you ask, so most Americans get more money back using the standard deduction, why is that bad? Because there are some, especially those opposed to this bill (the National Association of REALTORS® comes to mind), who believe the mortgage interest deduction is an important incentive for people to buy homes, and if more people begin using the standard deduction instead, they will be less inclined to buy a home. This argument may, at first glance, appear to have merit. It certainly does level the playing field some between owning and renting. But then you have to ask yourself, how many future home owners have you ever heard say, “You know, I really need to find myself a mortgage interest deduction, can you help me buy a home?” Right. To drive this point home a little further, at the end of this post you will see a table called “Primary Reason for Buying a Home” from NAR’s own 2017 Profile of Homebuyers and Sellers. Mortgage interest deduction is not mentioned at all, and the two closest categories that might represent it, “Affordability of Homes” and “Financial Security” rank 10th and 12th respectively on the list… EFFECTS ON SELF-EMPLOYED / REAL ESTATE AGENTS • Pass-through Income - Owners of pass-through businesses – which include sole proprietorships, partnerships and S-corporations – currently pay taxes on their firms' earnings through the personal tax code, meaning the top rate is 39.6%. (INV) (Now to be 37%. See table below.) This bill will create a 20% deduction for pass-through income. Certain industries, including health, law, and financial services, are excluded from the preferential rate, unless taxable income is below $157,500 (for single filers) and $315,000 for couples. (INV) Bottom Line: Independent contractors and pass-through business owners with personal service income, including real estate agents and brokers, with taxable income below the $157,500 or $315,000 thresholds, may generally claim the full 20% deduction under the personal service income exception. (NAR) SP – Beside other deductions and expenses, real estate agents with incomes below the thresholds will be able to deduct 20% of their taxable income. CHANGES TO BUSINESS / CORPORATE TAXES • The bill would create a single corporate tax rate of 21%, beginning in 2018, and repeal the corporate alternative minimum tax. (INV) • Allows full and immediate expensing of short-lived capital investments for five years. Increases the section 179 expensing cap to $1 million. (TF) • Limits the deductibility of net interest expense to 30 percent of EBITDA for four years, and 30 percent of EBIT thereafter. (TF) • Eliminates net operating loss carrybacks and limits carryforwards to 80 percent of taxable income. (TF) • Eliminates the domestic production activities deduction (section 199) and modifies other provisions, such as the orphan drug credit and the rehabilitation credit. (TF) SP – There are a number of other changes to the Corporate tax structure. If you need further detail, congratulations on your corporate success… and you need to talk to an actual tax expert. I just play one on TV sometimes. (There are a number of other changes, including a repeal of the Affordable Care Act individual mandate. Please use the links at the end of this post to further nerdify yourself.) FAQS Q: Am I going to lose my mortgage deduction? A: No, your existing mortgage deduction is grandfathered in. If you are buying a home (and it is after 12/14/17) your deduction will be limited to the first $750,000 of your mortgage instead of the $1,000,000 it used to be. Q: Do I have to stay in my home longer now to avoid paying some or all of the capital gains taxes when I sell my primary residence? A: Nope! It stays as it was: You must live in your property for 2 of the past 5 years to qualify. Q: Is my home value going to decrease? A: Very unlikely, at least in response to the new Tax Bill. (Cyclical markets, government strangulation of innovation, crushing debt… different issues.) Some home markets, primarily in the $850,000 to $1,000,000 or $1,500,000 range, may see a slower turnover, though those properties are largely located in areas that are highly desirable for other reasons. Q: What’s going to happen to our economy with this Tax Bill? A: Whoa! Do I look like a Fortune Teller? (I mean, if you discount the long scarf I wear on my head, and this glass globe I carry everywhere for good luck…) There are some who believe that opening the financial floodgates of business will create new innovation, new jobs, and increased GDP. (Gross Domestic Product, or the output of America as a nation). Others believe that the very top earners, who already pay almost half of all income taxes, will keep any gains and thumb their collective noses at everyone else. Me… I don’t know if most of us will even notice much difference, other than a little extra in our paycheck every month. Which reminds me, it really is a good time to sit down and discuss the benefits of long-term investment in residential real estate, don’t you think? Tables next… (Yay!!) followed by links to earn your Gold Star in nerdy. TABLES! Tax Brackets for Ordinary Income (2018 Tax Year) Single Filer Current Law ....................................... Tax Cuts and Jobs Act 10% $0-$9,525 .................................. 10% $0 - $9,525 15% $9,525 - $38,700 ....................... 12% $9,525 - $38,700 25% $38,700 - $93,700 ..................... 22% $38,700 - $82,500 28% $93,700 - $195,450 ................... 24% $82,500 - $157,500 33% $195,450 - $424,950 ................. 32% $157,500 - $200,000 35% $424,950 - $426,700 ................. 35% $200,000 - $500,000 39.6% $426,700+ .............................. 37% $500,000 Tax Brackets for Ordinary Income (2018 Tax Year) Married Filing Jointly Current Law ....................................... Tax Cuts and Jobs Act 10% $0 - $19,050 .............................. 10% $0 - $19,050 15% $19,050 - $77,400 ..................... 12% $19,050 - $77,400 25% $77,400 - $156,150 ................... 22% $77,400 - $165,000 28% $156,150 - $237,950 ................. 24% $165,000 - $315,000 33% $237,950 - $424,950 ................. 32% $315,000 - $400,000 35% $424,950 - $480,050 ................. 35% $400,000 - $600,000 39.6% $480,050+ .............................. 37% $600,000+ LINKS! TF: https://taxfoundation.org/final-tax-cuts-and-jobs-act-details-analysis/ NAR: https://www.nar.realtor/tax-reform/the-tax-cuts-and-jobs-act-what-it-means-for-homeowners-and-real-estate-professionals And https://www.nar.realtor/tax-reform/nar-issue-brief-hr-1-the-tax-cuts-and-jobs-act-conference-agreement INV: https://www.investopedia.com/news/trumps-tax-reform-what-can-be-done/ TPC: http://www.taxpolicycenter.org/sites/default/files/publication/138246/2001144-the-standard-deduction-and-personal-exemption.pdf Laffer Curve: https://www.investopedia.com/terms/l/laffercurve.asp Trickle Down Economics: https://www.investopedia.com/terms/t/trickledowntheory.asp

Feeling the holiday spirit here at the office! #thriverealestate #lamesa #realestate #thrive #christmasdecor

It’s the most wonderful time of the year... Full of holiday spirit and festive cheer... As we wait for jolly ol Santa to arrive... Live life to the fullest and always remember to THRiVE! #thriverealestate

We have joined Oakwood Escrow in their Holiday Clothing Drive for the homeless. They donate all clothing, blankets - and ESPECIALLY children's wear - to the Alpha Project. Please stop by for some HOT COOKIES & COCOA, and bring a few items from your closet that will help others. See you Tuesday!

Here's a great Business Insider article on the workplace of the future. Agents will generate more business, in an environment continuously adapting to their needs. It's a great read. Or... you can see the future now at THRiVE Real Estate! http://www.businessinsider.com/photos-an-inside-look-at-the-coolest-workplaces-of-the-future-2017-10?pt=385758&ct=Sailthru_BI_Newsletters&mt=8&utm_source=Triggermail&utm_medium=email&utm_campaign=email_article/#-cubbies--4

Attention! Attention! COOKIES & COCOA ANNOUNCEMENT!! This year we have joined Oakwood Escrow in their Holiday Clothing Drive for the homeless. They donate all clothing, blankets - and ESPECIALLY children's wear - to the Alpha Project. Please bring your items and join us for COOKIES AND COCOA on Tuesday, Dec 12th between 3:30 and 5:30. Right here at #THRiVERealEstate.