By Joshua Burd
The tax reform package is widely seen as a boost to the already thriving apartment sector. At the very least, experts say the changes could delay an existing renter’s decision to transition to homeownership, although many stopped short of saying that it would have dire effects on the for-sale market.
“It’s only going to be beneficial to us in the apartment business,” said Alan Hammer, a real estate attorney with Brach Eichler LLC and a longtime multifamily owner in the region, while noting that “people don’t aspire to live in apartments. … Most people still want to own a home if they can, but I think that it will slow it down and people will stay in apartments longer.”
Otteau expects the impact to be especially pronounced in the near term. Confusion and misinformation about the new tax code could cause prospective buyers to hesitate, he said, noting that the largest number of lease renewals come up in the first half of the year.
“There’s still this lack of clarity as to what this all means,” said Jeff Otteau, president of Otteau Valuation Group, referring to the general perception of the public. “So there will be a large number of present-day renters who will decide to renew their leases for at least another year until they fully understand what these tax law changes mean as to the tax deductibility and the tax benefits of homeownership.”
They will find that the overhaul does not necessarily make homeownership less affordable for low- and middle-income families, he said, despite the claims of skeptics. For instance, while the tax law caps deductions for state and local taxes at $10,000 and eliminates personal exemptions, Otteau said those losses will be offset by lower federal tax rates.
Such changes to homeownership-related deductions are more likely to affect upper-income filers, although the effects would also be softened by savings from new tax rates.
Still, the near doubling of the standard deduction can only help the appeal of renting. Prior to this year, a married couple who rents would have been hard pressed to get above the standard deduction of $12,700 without expenses such as mortgage interest and property taxes, meaning homeowners have long had the greater opportunity for savings.
Now that the standard deduction for joint filers is $24,000, most married couples would not exceed that threshold using their homeowner-related expenses and so-called SALT taxes.
That could prove to be an important long-term factor for those who are deciding between renting and owning, Otteau said, although he still expects the for-sale housing market to grow in the years to come. He also noted that the new changes for personal income tax filers sunset in 2025, in part so that the federal government can backtrack if the reform measure does not result in economic growth and ends up adding to the national debt.
“The sky is not falling. People buy houses for many reasons and there are a wide range of factors that drive the desire for homeownership, of which what happens on your federal tax return is only one,” Otteau said, pointing to lifestyle, pride of ownership and school districts. “In my view, where that ranks on the list is relatively low.”