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The housing industry is up in arms over the proposals, and shares of real estate brokerage firms such as Remax and Realogy have tumbled since the House version came out Nov. 2. But house hunters who have been priced out of the market might welcome any dip.
The bills have many moving parts that are likely to change as they work their way through Congress, but here are the provisions that would most directly affect homeownership.
Property tax deduction: Under current law, homeowners can take an itemized deduction for property taxes. The House version would limit this deduction to $10,000 per year for all homeowners starting next year. The Senate version released Thursday would eliminate it. Both versions would eliminate the deduction for all other state and local taxes, including income tax.
More on GOP Tax Bills
Mortgage interest deduction: Today, homeowners can deduct interest on up to $1 million in debt used to buy, build or improve first and second homes (acquisition debt). They can also deduct interest on up to $100,000 in home-equity debt (money borrowed against a home for other purposes, such as buying a car).
Under the House version, if you took out a home loan on or after Nov. 2, you could deduct interest on only up to $500,000 in debt on a primary residence. You could deduct no interest on a second home or home-equity loan.
Under the Senate version, you could still deduct interest on up to $1 million in acquisition debt on a first or second home. But you could not deduct interest on home-equity debt.
In other words, the House version reduces the mortgage interest deduction but leaves the property tax deduction mostly intact. The Senate version eliminates the property tax deduction but leaves the mortgage interest deduction mostly intact. These differences matter less than they seem because most homeowners who take one of these deductions take the other. “It’s a give and take,” said Skylar Olsen, senior economist from Zillow, a real estate website.
Standard deduction: What matters more is that both versions would roughly double the standard deduction — to $24,000 for married couples filing jointly and $12,000 for single filers.
Today, only about 30 percent of people who file tax returns itemize deductions (in California, about 33 percent do). Under the House version of the bill, only 10 percent would itemize, according to an estimate by the Tax Foundation.
That means fewer homeowners would get any benefit from a mortgage interest or property tax deduction. However, for most people who would switch from itemizing to not itemizing, the value of those deductions probably was not large enough to sway their decision to buy or not buy a home. In most markets, “the value of the mortgage interest deduction is negligible, because the value of the home, the debt you have on that home, the interest that you can deduct does not get you above and beyond the standard deduction, even currently,” Olsen said.
Capital gains: Today, you can exclude up to $250,000 in capital gains ($500,000 if married) when you sell your house, as long as you have owned and used it as your primary residence for at least two of the past five years. Both versions would change this to five of the past eight years. The House (but not the Senate) bill limits this tax break for households with adjusted gross income higher than $500,000 (married) or $250,000 (single).
As a whole, these changes could have a “modest impact on the priciest homes,” but not on the vast majority, said Jared Walczak, a senior policy analyst with the Tax Foundation. “The reasons people buy a home, or make a decision not to, have a lot to do with aspirations and financial resources and very little to do with whether the government has created this express nudge,” he said.
Based on its home-value estimates, Zillow calculates that 100 percent of people who bought a home today in San Francisco, where the median home value is $1.24 million, would take the mortgage interest and property tax deductions in the first year of ownership. Under the House bill, 96 percent would and under the Senate bill, 93 percent would.
In Alameda County, where the median home value is about $783,800, about 99 percent of people who bought today would take the deductions. However, that drops to 78 percent under the House bill and 55 percent under the Senate’s.
Although most people in the Bay Area would still benefit from the deductions, limiting them “might impact your decision to buy a more expensive or less expensive home. The size of the mortgage interest deduction can be significant for a lot of households,” Olsen said. If you limit the deduction “your willingness to outbid at the high end drops.”
That could put downward pressure on high-end home prices. But “it would not take away one of the major drivers” of Bay Area real estate, “which is is constrained inventory in the face of incredibly strong demand,” Olsen added.
Bose George, an analyst with Keefe, Bruyette Woods who follows the real estate industry, said, “We don’t think any of these changes would permanently impact the market,” although they could slow the rate of home-price appreciation in hot markets. “It obviously changes the equation (for) how much you can pay for a home. There could be a bit of a slowdown in markets that have been very strong for a while,” he said.
In the United Kingdom, Australia and Canada, homeowners can’t deduct mortgage interest, but those countries have homeownership rates similar to the United States.
Richard Green, a real estate professor at the University of Southern California, calculated that if Congress got rid of the mortgage interest deduction entirely, it might reduce the U.S. homeownership rate, currently around 64 percent, by about a half a percentage point, but prices could fall by 10 to 11 percent. “You have high-income people outbidding lower-income people for the same house because they get a bigger tax break,” he said. If you remove the deduction, they would still buy a home, but pay less for it. If you cut the maximum deduction in half, “you might knock (prices) down 5 percent. Given that they are rising 3 or 4 percent (a year) it wouldn’t be noticeable,” he said. It could even be good if it makes housing “a tad bit more affordable.”
The bills’ sponsors say that most Americans would receive a net tax cut under their proposals. If that’s true, it could be positive for real estate, because people would have more money to spend on a home, even if they lose some tax deductions.
While that may be the case in most states, it would not be in California, because many people here would pay more federal taxes after losing the state and local tax deduction, said Ken Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at UC Berkeley.
“If either version passes, it’s quite negative for California and other states with high taxes,” he said. California has the highest maximum income tax rate, 13.3 percent. It is one of six states that together claim half the value of the state and local tax deduction.
“Too many blue-state Republicans cannot vote for this,” Rosen said. For that reason, he doesn’t think any bill that passes will eliminate the state and local tax deduction.
Kathleen Pender is a San Francisco Chronicle columnist. Email: firstname.lastname@example.org Twitter: @kathpender