How the GOP tax plan would affect home owners and buyers
The impact will largely depend on where you live — and how much your house is worth.
The GOP tax reform plan contains a number of changes that will affect homeowners and buyers alike.
Prior to the plan’s release, the housing industry sounded an alarm about changes to the deductions for mortgage interest and property taxes. While these popular deductions would remain in place, Republicans still plan to alter them in meaningful ways — which experts say makes it more complicated to determine who would be most adversely affected by the GOP’s legislation.
“Generally there’s a lot not to like about the House tax reform proposals from a housing perspective,” said Rick Sharga, executive vice president of online real estate marketplace Ten-X. “Virtually everything in there could be a problem for housing.”
What are the biggest housing-related changes?
The GOP’s proposal would limit the deductibility of mortgage interest to $500,000 — which is half of the current limit of $1 million. This limit would be imposed on mortgages used to purchase homes from Nov. 2, 2017 onward. Mortgages originated before then would be grandfathered in, as would refinances on homes bought prior to the cut-off.
The mortgage interest deduction would only apply to principal residences. Currently, consumers can also apply it to second or vacation homes.
Individuals will still be able to itemize deductions for state and local property taxes, capped at $10,000.
Tax benefits on money earned through the sale of primary residence would also change. As of now, a taxpayer can exclude from their gross income up to $500,000 for joint filers and $250,000 for others earned through a home sales. Taxpayers currently can take this deduction once every two years, and they must have owned and used their property as their primary residence for two out of the previous five years.
If the Republican plan is approved, taxpayers will be required to have owned and used the home as their main residence for five out of the previous eight years to qualify, and the exclusion could only be taken once every five years. The benefit would be phased out by one dollar for every dollar a taxpayer’s adjusted gross income exceeds the maximum amount ($500,000 for couples filing jointly, $250,000 for everyone else). So, for example, if a couple earns $200,000 in income, only $300,000 of the home sale would be excluded from their gross income.
Home prices could go down temporarily in some parts of the country
“Any time that you dampen demand, which this plan would do by removing that incentive, you see prices fall,” said Danielle Hale, chief economist at Realtor.com. (MarketWatch is a unit of News Corp subsidiary Dow Jones, and Realtor.com is operated by Move Inc., which is also a subsidiary of News Corp.)
Price declines would be short-lived and likely not too widespread though. As experts have argued, few homeowners are already taking the mortgage interest deduction as is. And over time, the market will adjust to the new equilibrium caused by the change to the mortgage interest deduction.
Consequently, any impact on home prices would be most acutely felt where these taxpayers are most concentrated, namely expensive real estate markets on the coasts — particularly “in the upper echelons in expensive markets,” said Svenja Gudell, chief economist at real estate website Zillow.
Changes to the mortgage interest deduction could hurt home buyers in some states
In four markets, a majority of homes are valued higher than the new limit for the mortgage interest deduction, according to data from Zillow: San Jose, Calif. (94.4%), San Francisco (80.5%), Los Angeles (72%) and San Diego (63%). In another four markets — Seattle, Boston, New York and Washington, D.C. — more than a third of homes have values in excess of $500,000. “The middle class in these areas are going to feel the pinch,” Sharga said.
Eventually though, much of the country could be impacted by the lower cap on the mortgage interest deduction. Hale predicted that within the next couple of decades the median home price nationwide will be near or in excess of $500,000. Given that it’s been more than 30 years since the last substantial change to the tax code, that could mean a growing number of home buyers will need to be concerned about this cap.
People may choose to stay in their homes longer
Firstly, the change to the mortgage interest deduction grandfathers in people whose loans are larger than the new cap. Some of these homeowners may decide against moving to a larger, more expensive home if it means they would lose their tax benefits. Instead, they might decide to get a cash-out refinance or to take out a home equity loan to make home improvements.
Secondly, homeowners must now stay in their house for longer and move less frequently to qualify for the tax breaks on the proceeds of a home sale.
Both reasons will exacerbate existing problems. “It’s just another way that we’re de-incentivizing mobility,” said Hale. It also threatens to make inventory shortages worse and to drive up home prices. As a result, first-time home buyers have less affordable inventory to choose from.
Some say people looking to buy might choose a cheaper home
The new tax code could influence Americans’ choice of home.
“If people still need to move they’re going to move, they just might not go up that extra $150,000” in cost, said Brian Koss, executive vice president at Mortgage Network, a lender headquartered in Danvers, Mass. “People don’t buy a home for a deduction, but it helps them decide where to push the envelope and how to justify the numbers.”
As a result, people could move to smaller homes in the suburbs in an effort to keep their mortgages below the maximum cap.
Others argued though that the tax implications of a home’s value are hard to assess, meaning that few buyers will have this as top-level consideration. “I have a hard time believing that people are going say they won’t pay a certain price anymore,” Gudell said.
The larger standard deduction could help renters become homeowners
Renters who receive a larger tax return because of the bigger deduction could save that money for a down payment. And given that down payments are a major hurdle for many millennials waiting on the sidelines of the housing market currently, that could be huge. “Doubling of the standard deduction will do a whole lot more to help people become homeowners,” Gudell said.
SOURCE: JACOB PASSY
