What will the housing market look like in 2017? How about 2020?

Housing performance depends on a lot of factors, including local job performance, interest rates and local zoning laws. Federal tax policies, like the Affordable Care Act in recent years, can also influence the housing market.

Here, we outline the basics of the federal tax proposals from four presidential candidates:

  • Hilary Clinton;
  • Ted Cruz;
  • Bernie Sanders; and
  • Donald Trump.

Details on John Kasich’s tax plan are forthcoming, and thus are not included in this article.

To explain the tax proposals broadly, the Democratic candidates propose to increase taxes, mostly on the wealthy (in most cases, those making $200,000 or more a year). On the other hand, the Republican candidates plan to decrease taxes for most, though again the wealthy see the biggest impact. Neither party has plans to adjust the mortgage interest deduction (MID).

To see how the plans will influence housing, the most significant tax pieces to look for are adjustments to:

  • capital gains, which in real estate terms is the taxable income on the sale of real estate;
  • net investment income, which for real estate includes income, profit and losses from the operation and sale of rental property, and interest income and profits on land held for resale; and
  • tax rates based on tax bracket, which affect how much money is in your clients’ pockets.

To a smaller extent, taxes on estates and gifts will affect your homeowner clients, so they are discussed here as well.

For a baseline, 2015 tax law has:

  • long-term capital gains (held for one year or longer) taxed at a maximum rate of 20% for the highest income bracket or 23.8% including the Affordable Care Act taxes;
  • short-term capital gains (held for less than one year) taxed at a maximum rate of 39.6% (the same as ordinary income tax rates) or 43.4% including the Affordable Care Act taxes for the highest income bracket;
  • the net investment income tax as an additional 3.8% tax on investment income, for singles earning over $200,000 and joint filers earning over $250,000; and
  • the tax rates range from 10% for the lowest income earners — in 2016, this means single filers earning up to $9,275 or joint filers earning up to $18,550 — to 39.6% for the highest earners — single filers earning over $415,050 or joint filers earning over $466,950.

Hilary Clinton

Clinton’s tax plan will increase federal revenue by $1.1 trillion in the next ten years, according to an estimate by the Tax Policy Center. This increased revenue is meant to pay for Clinton’s College Affordability plan.

The tax increases will primarily affect the top 5% of household earners, though overall the tax changes proposed are limited. Those with incomes over $730,000 will see their taxes increase by $78,000 on average, equal to a reduction of 5% in after-tax income. Those with incomes over $1 million will pay a 30% effective tax rate. Income over $5 million will be subject to a 4% surcharge.

Clinton’s team claims they will expand her tax plan to include a tax reduction to low- and middle-income households, but have not yet fleshed out the details.

Of specific interest to real estate, Clinton’s plan will:

  • return the estate and gift tax rate to 2009 levels, which will reduce the individual exclusion from $5.45 million to $3.5 million, and the exclusion for couples from $10.9 million to $7 million, while raising the top tax rate from 40% to 45%; and
  • create a new capital gains schedule — the current schedule taxes the gain at the regular income tax rate (maximum of 43.4% including the additional tax introduced by the Affordable Care Act) if it is realized within less than one year of acquiring the asset and at a maximum of 23.8% if it is realized anytime after a year — Clinton’s plan will reduce the capital gains tax based on years the household holds the asset before realizing the gain so that capital assets held:
    • less than two years will be taxed at the regular income tax, at a maximum of 43.4%, depending on the taxpayer’s tax bracket;
    • two-to-three years will be taxed at a maximum of 39.8%, depending on the tax bracket;
    • three-to-four years will be taxed at a maximum of 35.8%;
    • four-to-five years will be taxed at a maximum of 31.8%;
    • five-to-six years will be taxed at a maximum of 27.8%; and
    • over six years will be taxed at a maximum of the current 23.8% tax rate.

Ted Cruz

Cruz’s plan will reduce federal revenue by $8.6 trillion in the next decade. Without a decrease in federal spending, this plan will increase the national debt by about $1.3 trillion over the next 10 years, including interest, according to the Tax Policy Center.

For perspective, $8.6 trillion over ten years is roughly the same as the:

  • U.S. military budget (estimated at $6 trillion to $7 trillion over the next ten years, according to the Department of Defense); plus
  • U.S. education budget (estimated at $900 billion over the next ten years, according to the Department of Education); plus
  • U.S. transportation budget (estimated at around $1 trillion over the next ten years, according to the Department of transportation).

Most of these tax cuts are to wealthy households. The top 0.1% of taxpayers — those with incomes higher than $3.7 million — will receive an average reduction of 29%, equal to over $2 million per household. The average household tax reduction, which includes lower-income taxpayers, is 7%, equal to $6,350.

Among other changes, but specific to real estate, Cruz’s plan will:

  • collapse the seven tax brackets of today into a single 10% tax bracket;
  • repeal the 3.8% healthcare tax on net investment income for taxpayers with incomes over $200,000 for single filers and $250,000 for joint filers;
  • repeal the 0.9% Social Security and Medicare tax introduced with the Affordable Care Act, as well as all other Social Security and Medicare taxes;
  • repeal the estate and gift taxes; and
  • lower the effective rate on capital gains.

Bernie Sanders

Sanders’ plan will increase federal revenue by $15.3 trillion in the next ten years, according to the Tax Policy Center estimate. All of this revenue will go toward new government programs. The most expensive program this will fund is a new government health program, which Sanders’ campaign calls Medicare for All. Under his healthcare plan, the average family making $50,000 will save an average of $5,800 a year on healthcare costs, which will offset the tax increase (for low- and middle-income households).

The plan will also expand Social Security, Keep Our Pension Promises and Paid Family and Medical Leave. It will also expand or create programs such as College for All, Youth Job Programs, Creating Jobs Rebuilding American and Combating Climate Change to Save the Planet.

Tax increases will affect nearly all households, though the biggest increases will be to the wealthy. The top income earners, earning over $3.7 million, will pay on average an additional $3 million (their average after-tax income equaling $6.9 million), or 45% of their after-tax income. Middle-income households will see their taxes increase on average by 8.5% or $4,700. In the bottom income bracket, average taxes will increase by 1.3% or $165.

Among other changes, but most significant to real estate, Sanders’ plan will:

  • increase the surtax on net investment income introduced by the Affordable Care Act from 3.8% to 10%
  • increase the capital gains tax rate for single-filers making over $195,100 and joint filers making over $237,500 from 15%-20% to 28%;
  • decrease the capital gains exclusion to a lifetime exclusion up to the first $250,000 excluded;
  • keep the bottom income tax brackets intact, but limit the regular income tax bracket to 28%;
  • add an additional surtax of 2.2% on all taxable income;
  • add an additional graduated surtax on income for households with individuals with incomes over $200,000 or $250,000 for joint filers—this surtax equals an additional:
    • 9% on income between $200,000 (or $250,000 for joint filers) and $500,000;
    • 15% on income between $500,000 to $2 million;
    • 20% on income between $2 million and $10 million; and
    • 24% on income over $10 million.

Donald Trump

Trump’s tax plan will reduce federal revenue by $9.5 trillion in the next decade. Without a decrease in federal spending, this plan will increase the national debt by $1.6 trillion over ten years, including interest, according to the Tax Policy Center.

For perspective, $9.5 trillion over ten years is roughly the same as the:

  • U.S. military budget (estimated at $6 trillion to $7 trillion over the next ten years, according to the Department of Defense); plus
  • U.S. education budget (estimated at $900 billion over the next ten years, according to the Department of Education); plus
  • U.S. transportation budget (estimated at around $1 trillion over the next ten years, according to the Department of transportation); plus
  • U.S. protection budget, which includes Homeland Security (estimated at over $600 billion over the next ten years).

Most of Trump’s tax cuts affect wealthy households. The top 0.1% of taxpayers — those with incomes higher than $3.7 million — will receive an average reduction of 19%, equal to $1.3 million per household. The average household tax reduction, which includes lower-income taxpayers, is 7%, equal to $5,100.

Among other changes, but of specific interest to holders of real estate, Trump’s plan will:

  • tax capital gains at a ceiling of 20%;
  • repeal federal estate and gift taxes;
  • repeal the 3.8% healthcare tax on net investment income for taxpayers with incomes over $200,000 for single filers and $250,000 for joint filers.

The best plan for housing?

Of the four candidates with in-depth tax plans, is there one that stands out as best for the housing market?

It’s a complicated question to answer. On a superficial level, tax plans that increase the capital gains ceiling and reduce income and investment taxes will encourage real estate investment. However, plans that generate revenue claim to gain the ability to rebuild infrastructure, which will ultimately improve neighborhood desirability and boost home values. Income inequality is also a factor to wrestle with, as reducing taxes on the wealthiest while maintaining similar rates for low- and middle-income households will continue to stifle buyer purchasing power for the biggest pool of homebuyers.

Further, no candidate is likely to pass their entire tax plan intact. As with all politics, the goal of compromise is to bring the policy introduced toward center.

Which plan do you think will be best for the housing market, you and your clients? Share your thoughts in the comments!