As Republicans worked Monday to reconcile conflicting versions of their tax plans, a prominent group of real estate brokers is warning that both the Senate and House proposals will slash home prices and values in California and beyond.
The proposed cuts to real estate-focused tax deductions could cause prices in the Golden State to drop between 8 and 12 percent, leading to a loss in home value of between $37,710 and $56,550 for the typical home owner, according to the National Association of Realtors, which continued to opposed the bills as Republicans moved closer to a final plan over the weekend.
While a price drop may sound like good news to Bay Area residents bemoaning the region’s soaring housing prices, the trade group says plummeting prices could bring new troubles — including a reluctance to sell that could further squeeze an already tight supply of homes. The strain is expected to be greatest in regions like the Bay Area, where home prices are already high.
“The tax incentives to own a home are baked into the overall value of homes in every state and territory across the country,” association president Elizabeth Mendenhall wrote in a news release over the weekend condeming the proposed tax overhaul. “When those incentives are nullified in the way this bill provides, our estimates show that home values stand to fall by an average of more than 10 percent, and even greater in high-cost areas.”
Affordable housing advocates also worry the tax overhaul will gut California’s efforts to house its low-income residents.
It’s not yet clear what the final tax plan will look like. Republicans still have plenty of work to do to iron out the differences between the House and Senate proposals. They reportedly expect to pass a final version before Christmas.
So how would the tax proposals affect our housing market?
One of the key provisions is the mortgage interest deduction — the tax break homeowners get for the interest paid on a mortgage. Under current law, homeowners can deduct interest on purchases of up to $1 million for a primary residence and one other home, plus an extra $1 million for equity debt. The Senate bill would keep the former cap in place, but eliminate the equity debt deduction, Forbes reports. The House plan would grandfather in existing mortgages, but would cap new mortgages at $500,000. In addition, homeowners would get no deductions for a secondary residence.
Halving that deduction cap could impact as many as half of Californians who have a mortgage, according to the National Association of Realtors. Last year 49 percent of housing units with a mortgage were worth more than $500,000. Homeowners who claimed the mortgage interest deduction saved an average of $3,070, the association said.
Another controversial housing-related item in the tax proposals is the capital gains provision. Under current law, homeowners can exclude up to $250,000 (or $500,000 for married couples) in capital gains on the profit from the sale of a home — if they have lived in the house for two of the last five years. Both the House and Senate proposals would change that — homeowners must have lived in the house for five of the past eight years to qualify for the savings.
Last year, 13 percent of homeowners in California had lived in their home for between two and four years, meaning they won’t be eligible for that tax exclusion, according to the National Association of Realtors. Some housing experts worry the GOP tax plans will encourage Bay Area homeowners to stay put instead of selling, exacerbating the region’s housing shortage.
Both the House and Senate tax plans would also cap the property tax deduction at $10,000.
A recent White House analysis of the tax proposals attempted to put homeowners’ fears at ease. Last month, researchers with the Council of Economic Advisers estimated a “muted” drop of less than 4 percent in housing prices as a result of proposed changes to the mortgage interest deduction. Meanwhile, the researchers wrote, the rate of home ownership may rise “modestly.”
The researchers noted that while itemized tax deductions would be reduced under the proposals, the standard tax deduction would be increased. The current standard deduction of $6,350 for single tax payers would jump to $12,000, and the deduction of $12,700 for married tax payers would jump to $24,000.