Home Capital Gains Tax Rules May Change

Progress with the tax reform bill, combined with strong economic data, has the stock market again setting new all-time high records.  The House and the Senate are getting closer to having a reconciled bill, which is increasing the optimism amongst investors that Tax Reform is imminent.  At this stage, we can anticipate that the final revisions will be complete by the end of next week.  This would set the stage for the tax savings for many Americans to kick in at the start of 2018.  Of course, small business owners are celebrating, with the Small Business Optimism Index hitting a level not seen in 34 years.  Further, it shows that small business owners expecting to hire new employees is very strong.  This tax plan will likely be a strong driver of economic growth soon.

There is one potential change to the tax code that very few people are talking about that will greatly impact the housing market.  Under current tax code, a homeowner can sell a home and receive tax free gains of up to $250,000 per person.  So, a couple who sells a home could make a $500,000 tax-free profit if they have lived in the home for 2 of the last 5 years.  The proposed capital gain exclusion in the proposed bill would require that the home be used as a primary residence for 5 of the last 8 years.  This would mean that people who sell after living in the home between 2-5 years would have to pay taxes on the profit.  Depending upon tax brackets, this would be 15-20% of the profits going to Uncle Sam.  This will likely keep many people in their homes longer as they wait to sell until they are able to avoid paying taxes on the gain.  This will further reduce inventory on the market as well as the number of people looking to make a move. 

Mortgage bonds have fallen all the way down to the bottom of the trading channel.  We have been locking since prices hit the top of the channel, but there could be room to float at current levels and see if they hold.  However, if prices break beneath this barrier, we will be in an entirely different channel that will likely lead to additional price deteriorations.  For those who are risk adverse, which is for most people, the safe play remains to lock.