Pricey U.S. housing markets, from the New York suburbs to California’s coastal cities, could take a direct hit under the tax-reform bill released by House Republicans.
Under the bill, mortgage interest would be deductible on loans up to $500,000 instead of the current $1 million for couples filing jointly -- weakening the incentive in high-cost markets where property deals often require large mortgages. The deduction would be rendered useless for many others as the standard deduction is doubled and state and local tax deductions are substantially downsized, diminishing the need to itemize.
The plan -- touted by President Donald Trump, a billionaire who made his fortune in real estate -- is sending the housing industry reeling, with some trade groups treating the bill as the most serious threat in decades. The National Association of Realtors said the initial memo released “appears to confirm many of our biggest concerns,” while homebuilder shares tumbled the most in almost a year.
In expensive markets such as the San Francisco Bay area, where home prices have soared in recent years and stretched affordability for many buyers, capping mortgage deductions would diminish an incentive used by purchasers to offset costs. A limit to state and local property tax deductions at $10,000 may particularly hurt states with high rates like New York and New Jersey, leading to pushback from congressional leaders from those areas, which tend to be Democratic leaning.
Mark Zandi, chief economist at Moody’s Analytics, said the tax changes could initially cut prices by 10 percent in expensive markets and 3 percent to 5 percent across the U.S.
“You can see why the industry is not too excited by all this,” Zandi said. “It’s not good for home sales, house prices or new housing construction.”
Fewer Itemizing
About 7 million homes, including a third of homes in California and 19 percent in New York, would be affected by the mortgage-interest deduction cap if they were put on the market, according to a preliminary analysis by the National Association of Home Builders. The number of households that itemize to take advantage of the housing deduction would drop to less than 11 million from 34 million currently, according to the group.
The plan could also limit home sales in other ways. Under current law, a couple who sells their home is able to exclude up to $500,000 in capital gains from their gross income, as long as they used the home as their principal residence for two of the past five years. Under the new plan, they’d need to use it as their principal residence for five of the past eight years to qualify. Instead of being able to use that exclusion every two years, they’d only be able to use it every five years.
High-income homeowners might not be able to use the exclusion at all. Under the bill, the exclusion would be phased out by a dollar for every dollar a joint tax filer’s adjusted gross income exceeds $500,000.