One of the great things about owning a home is the tax breaks that typically come with it. The tax code allows homeowners to deduct a number of items come tax time, putting more money back in their pocket after dishing out to keep their properties operational.
But homeowners could face a big blow in terms of tax breaks as a result of the current Republican party’s tax reforms. In fact, home builders and real estate professionals could be negatively affected too.
Nearly all deductions have been quashed in the House and Senate plan, with some exceptions.
While several points of the new plan have raised eyebrows, it’s the eradication of the State and Local Tax deduction that has been the cause for most concern. Under the current law, taxpayers are permitted to deduct their state and local property taxes. But the bills would cap the property tax deductions or eliminate them completely.
Californians were able to reduce their taxable income in 2014 by $101 billion thanks to the federal deduction for state and local taxes. That’s the most out of any other state in the county, and far ahead of the distant second New York state with $68 billion in tax deductions. With the House and Senate bills in play, this number can be significantly slashed.
How Will the Republican Tax Proposals Affect Homeowners?
Homeowners would be impacted by the tax plans in a few ways:
- Taxpayers who itemize on their federal tax returns and deduct their mortgage interest will be capped as a result of the House bill. As of now, they’re able to deduct interest on mortgages up to $1.1 million. But if the House proposal goes through, that amount would be maxed out at $500,000 for future mortgages. The Senate bill would reduce the cap to $1 million.
- Those with vacation properties would not be able to deduct mortgage interest on their second homes as per the House bill, while the Senate bill would still keep it.
- Property tax deductions would be capped at $10,000 as per the House bill, and the Senate bill would eradicate them completely.
- Capital gains exemptions currently require that homeowners live in the home for a minimum of two out of the past five years. But under both bills, homeowners will have to live in their property for at least five out of the last eight years. The $250,000 exemption ($500,000 for married couples) won’t change.
In regards to the first point, it’s easy to see why homeowners would be highly concerned. Considering the fact that California has some of the most expensive housing markets in the country with many cities topping the $1 million mark for the average home price, capping the mortgage deduction at $500,000 would mean many homeowners would be losing out.
The San Francisco metropolitan area has a sky-high median home price tag of a whopping $1,282,200, and in San Mateo, that price is even higher at $1,522,500. These cities are no exception, as the list goes on for cities in California that boast hefty home prices.
According to the National Association of Home Builders, about 3.7 million households are already paying over $10,000 in property taxes annually, and a third of homes bought have more than $500,000 in mortgages in the Golden State.
Over 4 million California homeowners deduct mortgage interest on their tax returns, averaging about $12,000 every year. If the House bill slides through, this number will be significantly scaled back, and the Senate bill would mean no property tax deductions at all.
In a state that’s already plagued with exorbitant home prices, an inventory shortage, and a housing affordability issue, such bills could potentially scare people from buying altogether. After all, the potential to deduct property taxes and mortgage interest is one of the major perks to making the jump to homeownership. Taking these bonuses away doesn’t exactly sweeten the deal.
And with fewer buyers potentially dipping their toes in the homeownership pool as a result of the negative impacts of the House and Senate bills, realtors could inevitably lose out on commissions.
Overall, the reforms to the state and local tax deduction would likely cut down on disposable income for many homeowners and potentially scare off any would-be buyers who may have validated a home purchase with tax deductions. It remains to be seen how much the Republican tax reforms will alter the housing market in California going forward.