Colorado home­own­ers could pay re­sell price from GOP pro­pos­als

The Denver Post - - FRONT PAGE - By Aldo Svaldi

Years of rapid home price ap­pre­ci­a­tion along the north­ern Front Range will leave home­own­ers in the re­gion more vul­ner­a­ble to changes in the tax code now be­fore Congress.

Coloradans need to be aware of one change in par­tic­u­lar that could have big im­pli­ca­tions for them when it comes time to sell — an ex­ten­sion in the time own­ers must oc­cupy their homes to avoid pay­ing cap­i­tal-gains taxes.

“Home­own­ers across the coun­try should pay at­ten­tion. You will find the big­gest ef­fects, how­ever, in your big­gest, more ex­pen­sive mar­kets,” said Danielle Hale, chief econ­o­mist with Re­al­tor.com.

Right now, own­ers must have lived in a home for at least two years within the last five years at the time of sale to avoid pay­ing cap­i­tal gains taxes on any in­crease in value up to $500,000 for joint fil­ers and $250,000 for sin­gle fil­ers. For most home­own­ers, that means hold­ing on to a home for at least two years is a good idea.

But Congress, look­ing for ways to gen­er­ate more rev­enues to pay for cuts else­where, wants to ex­tend that to five years within the last eight years. That would force most home­own­ers to

wait five years or more to avoid a tax penalty that could reach into the tens of thou­sands of dol­lars.

Much at­ten­tion has been paid to pro­posed caps on de­duc­tions for mort­gage in­ter­est and prop­erty taxes, dif­fer­ing ver­sions of which are in­cluded in the Se­nate and House plans. While that change may af­fect only wealth­ier home­own­ers, it could lower home prices across the broader mar­ket and push sec­ond-home own­ers in places such as Colorado’s high coun­try to sell.

But the change that will have the great­est im­pact on av­er­age home­own­ers is likely to be the longer hold­ing pe­riod re­quired to avoid cap­i­tal gains taxes, said Lou Barnes, a se­nior loan of­fi­cer with Pre­mier Mort­gage Group in Boul­der.

“This one will sur­prise peo­ple. Peo­ple will sell homes and not re­al­ize they have left the safe har­bor. They will wind up with a large tax obli­ga­tion,” Barnes said.

Own­ers with a ten­ure of be­tween two years and five years ac­counted for about one in five home sales in metro Den­ver and Boul­der over the past 18 months, ac­cord­ing to sta­tis­tics pro­vided by Black Knight, a mort­gage an­a­lyt­ics firm based in Florida.

And ac­cord­ing to HSH.com, Den­ver is the coun­try’s “most re­cov­ered” large metro hous­ing mar­ket, with a fed­eral home price in­dex 72.3 per­cent above the peak reached last decade be­fore the hous­ing crash.

The me­dian home price in Boul­der was about $516,000, and $392,000 in metro Den­ver, as of Au­gust, ac­cord­ing to the Black Knight home price in­dex.

Sell­ers in metro Den­ver had an av­er­age profit above their ini­tial pur­chase price and other costs of $110,000, while those in Boul­der pulled down prof­its of $150,000. Na­tion­wide, the av­er­age gain on sale is around $80,000.

Up to $22,500

Cap­i­tal gains tax rates vary based on in­come, but in the mid­dle brack­ets they run 15 per­cent. That would trans­late into $16,500 in ad­di­tional taxes in Den­ver and $22,500 in Boul­der on a typical sale for who don’t wait the full five years to sell a prop­erty.

“Any cap­i­tal gains will likely be felt to a higher de­gree in Den­ver and Boul­der,” said Andy Walden, Black Knight’s di­rec­tor of mar­ket re­search.

Be­cause the cur­rent rules on cap­i­tal gains on a home sale are so ac­com­mo­dat­ing, few peo­ple pay at­ten­tion to them, Barnes said. Most home­own­ers will stay in a home at least two years, and those who do sell be­fore that will not see as much ap­pre­ci­a­tion, keep­ing the cap­i­tal gains tax lower.

Un­der the pro­posed tax plan, if a real es­tate agent or ac­coun­tant doesn’t warn a seller, or they don’t hear a hor­ror story from some­one hit with a huge tax bill, they risk fall­ing into a trap.

Some sell­ers may not re­al­ize their obli­ga­tions un­til they sit down to pre­pare taxes the fol­low­ing year, long af­ter they rolled any pro­ceeds into the next home, Barnes said.

That means own­ers, to the de­gree they can do so, will need to stay in their homes a min­i­mum of five years. That cre­ates an­other com­pli­ca­tion for the mar­ket.

The larger metro Den­ver area, with a pop­u­la­tion of 2.8 mil­lion peo­ple, had just over 5,000 homes avail­able for sale at the end of Novem­ber, ac­cord­ing to the Den­ver Metro As­so­ci­a­tion or Real­tors.

Not only is that at a record low for the month of Novem­ber, it is one-third of the nor­mal in­ven­tory over the past two decades for the month.

“If any Den­ver home sell­ers de­cide to de­lay or forgo home sell­ing, this would also con­tinue to con­strain for-sale in­ven­tory,” said Walden.

Tax de­duc­tion changes

While changes to the cap­i­tal gains hold­ing pe­riod are an is­sue con­sumers need to plan for, there is less agree­ment on what more lim­ited tax de­duc­tions for prop­erty taxes and mort­gage in­ter­est will mean for hous­ing.

Among the changes be­ing ham­mered out in a rec­on­cil­i­a­tion process be­tween House and Se­nate tax plans is an elim­i­na­tion of de­duc­tions on prop­erty taxes paid above $10,000 and on the in­ter­est on mort­gage amounts above $500,000.

Colorado has some of the low­est prop­erty taxes in the coun­try, so the $10,000 cap isn’t as big an is­sue here. But given how much prices have risen, homes val­ues top­ping $500,000 are be­com­ing more com­mon.

In the Den­ver-Aurora-Lake­wood area, about three-quar­ters of homes have a mort­gage on them. Of those, just over a fifth have a value of $500,000 or higher.

In Boul­der, seven in 10 homes carry a mort­gage, and of those, just un­der half are val­ued at $500,000 or more, ac­cord­ing to Re­al­tor.com

A home price above $500,000, how­ever, doesn’t mean the mort­gage is that large, given down pay­ments and the monthly prin­ci­pal paid.

Less than 4 per­cent of ac­tive mort­gages in metro Den­ver and 8 per­cent in Boul­der ac­tu­ally have a bal­ance that high, ac­cord­ing to Black Knight.

Given the run-up in home prices, about 8 per­cent of homes pur­chased last year had a mort­gage bal­ance above $500,000 in Den­ver, while 23 per­cent of new Boul­der mort­gages were that large, said Walden.

The pro­pos­als will grand­fa­ther those who al­ready have a mort­gage above the lim­its, soft­en­ing the im­pact.

Also, house­holds mak­ing above $250,000 a year al­ready face lim­its on the de­duc­tions they can claim, said Barnes, who views warn­ings about home prices fall­ing as overblown.

Will prices fall?

The Na­tional As­so­ci­a­tion of Real­tors (NAR) ar­gues the loss of real-es­tate-re­lated de­duc­tions could cost home­own­ers $1,000 more on av­er­age in taxes while pro­vid­ing renters a sav­ings of $500.

“The NAR is pre­dict­ing home prices could fall from 7 per­cent to 11 per­cent (in Colorado) if both the mort­gage in­ter­est and real es­tate taxes de­duc­tions are elim­i­nated,” said Steve Thayer, chair­man of DMAR and owner of Keller Wil­liams Ac­tion Realty in Cas­tle Rock.

That would trans­late into the typical homeowner in Colorado los­ing home eq­uity in the $24,000 to $36,000 range, Thayer said.

The mort­gage in­ter­est de­duc­tion on sec­ond homes, which ac­count for about 5 per­cent of the state’s hous­ing stock, is also on the chop­ping block.

In some moun­tain re­sort coun­ties, the share of va­ca­tion homes can run 30 per­cent to 40 per­cent higher.

Hale said she ex­pects more peo­ple will con­vert their sec­ond homes into rentals so they can claim the mort­gage in­ter­est and other de­duc­tions they will oth­er­wise lose.

That would make more rentals avail­able to ac­com­mo­date more tourists, whose spend­ing would give re­sort economies a boost.

But that added in­ven­tory, com­bined with the loss of tax breaks that helped off­set the cost of hav­ing a sec­ond home, could dis­cour­age new con­struc­tion.

That would harm re­sort economies, more so sec­ond-tier mar­kets such as Breck­en­ridge and Grand County that rely on Front Range buy­ers rather than the stomp­ing grounds of the wealthy in­clud­ing Aspen and Tel­luride.

Glen Wein­berg, chief op­er­at­ing of­fi­cer at Fairview Com­mer­cial Lend­ing in Steam­boat Springs, said on his daily lunchtime jog, he has no­ticed more va­ca­tion homes com­ing up for sale.

Peo­ple could be dis­ap­pointed with the pal­try snow or just mak­ing yearend fi­nan­cial moves. But the surge co­in­cides with the Con­gres­sional wran­gling over tax re­forms.

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