California’s biggest housing markets figure to be among the losers if a Republican-sponsored tax overhaul becomes law, according to two analyses of local market data.
Currently, a married couple can deduct interest on mortgages of up to $1,000,000; the GOP plan would cut that to $500,000.
Similarly, deductions of state and local property tax would be capped at $10,000. According to the Tax Foundation, the mortgage interest cap would hurt high-income taxpayers more than those in the middle- and lower-income brackets, because they likely own larger homes and have higher mortgage debt.
In some of the nation’s largest coastal cities, the impact could be significant. In the San Jose, Calif., for example metropolitan area, 75% of new mortgage loans thus far in 2017 were for more than $500,000, according to an analysis by CoreLogic Inc., a housing data provider. The median home price there is more than $1 million, and even small starter homes can climb well above the proposed cap. In San Francisco metro area, 60% of new loans were for more than $500,000, while in Los Angeles and San Diego, the figures were 44% and 37%, respectively.
In addition to capping the mortgage interest deduction, the bill also limits the amount of property taxes that households can deduct to $10,000 annually. That also could hit parts of California hard, where some homeowners pay many times that.
Jeff Barnett, vice chairman of the National Association of Realtors’ large-firm real-estate services committee, said his area will be hit “very, very hard” if the tax bill passes. Even if corporate tax cuts help boost the economy, he doesn’t think that will be enough to compensate. “You’ve taken away so many incentives for housing, they can’t spend” the money from any extra economic growth, he said.
The Bay Area, Southern California and New York are the most often cited cities impacted by the mortgage-deduction cap. According to Zillow eliminating the state and local tax deduction and doubling the standard minimum deduction would result in homes valued at more than $800,000 worth taking itemizing the mortgage deduction.
The impact of the cap on the mortgage deduction could further nullify the number of future homeowners impacted by tax reform. Zillow estimates that only 5% of homes would be valuable enough to take the mortgage deduction, and that’s before the newly announced cap.
Also, caps on property taxes aren’t expected to go up for inflation over time. That means that as property taxes rise, it could hurt homeowners even more.