- With a potentially higher cost of homeownership, we could see downward pressure on house pricing, and that could represent a buying opportunity for Chinese buyers.
Elements of the U.S. House and the Senate’s proposed new tax policies might make purchasing a home more expensive for Americans but cheaper for foreign homebuyers.
Lost buying power
Some analysis on Inman has already pointed out that proposed changes to the mortgage interest deduction, which is just one of the several proposed policies that affect real estate, could slash purchasing power for some American buyers by 40 percent.
Today’s tax code allows homeowners to deduct interest on mortgages worth up to $1 million. The House GOP wants to slice that limit in half, to $500,000 on new loans.
The housing industry has fought back fiercely. It believes the House plan could increase the cost of buying a home, slow some home construction and reduce the number of transactions in any given market.
This may sting a little
Here are two other changes to tax law that would likely be in any tax bill that the current Congress passes. As a doctor would say, these may sting a little. Either of these provisions could discourage Americans from buying new homes:
- Changes to rules around the capital gains exemption that would make it harder to claim (having to live in the home five out of eight years rather than two out of five).
- Elimination or capping of the ability to deduct all of your local property taxes from your federal tax bill, making homeownership more expensive.
If you can believe the National Association of Realtors and the National Association of Home Builders, the new tax bill will “harm home values, act as a tax on existing homeowners and force many younger, aspiring homebuyers out of the market.”
Would foreign buyers benefit?
I’m not an expert in tax law, but I am an expert on foreign buyers, particularly buyers from China.
According to NAR’s 2017 Profile of International Activity in U.S. Residential Real Estate, Chinese buyers top the list of foreign buyers; they snapped up $31.7 billion in U.S. homes between April 2016 and March 2017.
If the critics are right, and the tax bill does force American buyers out of the market, it would create a unique opportunity for purchasers from overseas to purchase at a discount.
As Jeffrey S. Detwiler, CEO of The Long & Foster Companies, told a colleague of mine last week, eliminating or capping the property tax deduction and reducing the mortgage interest deduction could result in a rising cost of homeownership, especially in the luxury market below $3 million to $4 million.
He said that “With a potentially higher cost of homeownership, we could see downward pressure on house pricing, and that could represent a buying opportunity for Chinese buyers.”
Just a lucky break
To be clear, this may not be intentional. It is probably just a lucky break. As far as we know, nothing in the tax bill was designed specifically to favor foreign buyers.
It’s just that the analysis suggests that Americans may be forced to pull back, and that could cause prices to fall. In that case, offshore buyers would be in a good position to get a bargain.
Foreign buyers would be unaffected by the new tax bill because they pay their taxes in their home country — not in the U.S. The only exceptions are foreign citizens who have U.S. green cards because as U.S. residents they do pay American taxes.
Your top priority
If you work with foreign buyers, this tax bill is an opportunity for you to prove your value and build stronger relationships. I know reading about taxes might normally put most of us to sleep, but this could directly affect your livelihood.
Keep your network informed of the latest news, whether by WeChat, email, phone or blog. Interpret the impact of the latest developments and what it could mean for your clients and friends.
When it comes to sellers, use your access and expertise with foreign buyers as a selling point. By no means would I recommend trying to rush homeowners or buyers into taking hasty action. You can tell them, however, about how the tax changes might affect them.
Will the tax reform bill be bad for the real estate market? I don’t know.
If it is, that might be good for foreign buyers. Either way, the uncertainty creates an opportunity for you to demonstrate your expertise and value to clients of all kinds.