Whether you already own a home or are thinking of purchasing, the new tax legislation pending before Congress poses serious questions: Am I going to get smacked with punitive new taxes? Will the value of my home decrease because previous real estate tax benefits have been stripped away? Or am I one of the lucky ones, well insulated against big losses?
Prospective buyers like Matthew Wie and Joe Weber already have figured some of this out and are taking defensive steps. Weber owns a house and lives with his family in the San Francisco Bay area, and Wie owns a home in Delaware. Both are looking to move and are considering shifting their home searches to locations where they’ll be less exposed to tax increases triggered by the new legislation.
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Weber told me in an interview that as residents of California, he and his family face a dilemma: If the final federal tax bill slashes deductions of state and local taxes (SALT), purchasing a new home in high-tax California will be significantly more expensive.
“I’ll only be able to afford less,” he said — presumably a lower price tag and smaller space than he and his family could obtain elsewhere. So the Webers are seriously thinking about expanding their home search to either the Reno, Nevada, area, where taxes and prices are much lower and Weber has identified good school opportunities, or Seattle.
Wie and his wife and daughter are contemplating a similar scenario — moving from Delaware to Pennsylvania. “We’re relatively high earners,” Wie said in an email, “so the flat 3.07 percent Pennsylvania (income) tax would benefit us more than the higher property taxes or (the federal) tax change would hurt us.” Wie’s wife’s employment location and local school quality also are key considerations.
Wie and Weber participated in a national survey of 900 prospective home buyers conducted by real estate company Redfin. The survey found that 33 percent of people who expect to purchase within the coming 12 months say they would consider moving to a different state if Congress eliminates SALT deductions. The Senate and House-passed tax overhaul bills would cut maximum SALT deductions to $10,000 and limit them to property taxes only.
Other matters for owners and potential buyers to consider:
▪ Home values impact. Though no independent or academic studies have been published estimating the effects of the new tax legislation on home values and prices, most studies to date have concluded that federal tax benefits are a component of property values. Strip these away and buyers will not obtain the full traditional financial benefits of ownership, and will pay less for homes.
Economists at the National Association of Realtors estimate that the tax changes could whack 10 percent off average prices around the country, with declines steeper in states with higher home costs and tax burdens, lower in areas with more moderate prices and taxes. The flip side of all this, of course, is that if prices do decline, that will make purchasing a home more affordable — potentially good news for renters and move-up buyers priced out of the current marketplace.
▪ Tax-free capital gains exclusion. Under the legislation, owners will still be able to “exclude” up to $500,000 ($250,000 for single filers) of gain on their home sales. But to qualify they will need to have lived in their house for five of the preceding eight years; for decades the standard has been two out of the preceding five years. For many buyers who own homes for extended periods, this change won’t matter. But for many others it could pose problems, especially for people who transfer jobs in less than five years, and owners forced to sell because of divorce, health or other issues.
▪ Mortgage interest, second home deductions. As of this writing, House and Senate conferees had not agreed on whether to cut the home mortgage interest deduction maximum to $500,000 or to eliminate interest write-offs on second homes. Both are only in the House version and would primarily affect upper income owners.
So where does all this leave you? It depends on what you own, where you live, what you earn and what you may want to buy. Overall, the Republicans’ tax changes look like a net plus for corporations and stockholders, but a net negative for people who’ve benefited the most from the tax code’s long-time preferences for homeownership over renting.
Kenneth Harney is executive director of the National Real Estate Development Center.