When Congress returns from the Thanksgiving recess, the battle over the tax plan will continue, and the entire housing industry will be paying attention.
The GOP tax bill passed by the House has called for capping the mortgage interest deduction and property tax deduction, while the Senate has set its sights on getting rid of the deduction for state and local taxes.
“I’m getting questions from my client base already: 'How is this going to affect me?'” said Los Angeles real estate agent Anselm Clinard.
Clinard fielded a lot of those questions recently at an open house for a two-bedroom bungalow in a hip Los Angeles neighborhood. The house was listed for under $800,000, lower than most of the houses in the area.
“Is it going to make it harder to buy?” one potential buyer asked.
Under the House bill, homeowners would be allowed to deduct interest on up to $500,000 of mortgage debt, down from $1 million under current law. The bill would also eliminate deductions for mortgages on second homes. Those changes would only apply to future homeowners, not existing ones.
“This hits New York. This hits Los Angeles hard, it hits San Francisco hard,” said Brad Keyes, a Los Angeles real estate broker. “It doesn’t hit most of the country as hard.” In Los Angeles, for instance, the median home price is more than $600,000.
In the neighborhood of Eagle Rock, palm trees tower over a mix of luxurious mid-century and Spanish-style homes. Keyes pointed out a house with a lush green lot and black gated fence.
“This house is probably $1.2 million,” he said.
Homebuyers in pricey neighborhoods like this one are the most likely to be affected by changes to the mortgage interest deduction. While the Senate plan doesn’t touch mortgages, it does call for scrapping state and local tax deductions, including property tax.
“If you can’t write off all your mortgage and if you can’t write off all your property tax, that’s a major disincentive,” Keyes said. Still, “I think people are still going to buy homes,” he said. “It’s just not as attractive anymore.”
The tax overhaul would also roughly double the standard deduction, which could discourage people from itemizing on their tax returns. To claim the mortgage interest deduction, homeowners need to itemize.
Kristopher Brown, a video editor, has been house shopping in Los Angeles for about a year now. He sees the mortgage interest deduction as a perk.
“I tend to not use it in my budget in terms of what I can afford, but it’s always like an icing on the cake that could lower the prices and help you own a home,” Brown said.
He said if the deduction were capped, it would effectively cost him an extra $4,000 a year. On the other hand, he said the proposed changes could help drive down home prices.
“So, we’re kind of standing still and watching 'cause there’s no point of buying if it’s going to hurt the housing costs and if things are going to start coming down soon,” Brown said.
He hasn’t been totally standing still – he’s been calling House Speaker Paul Ryan to complain about proposed changes to the mortgage interest deduction. Or at least he tried. He left a voicemail.
“Yeah, I actually left two 'cause the first time it cut me off,” he said. “It’s going to make my life more expensive, and I don’t want to spend more money.”
|The national association of Home Builders opposes the Republican tax bill|
|Could tax reform lead to millionaire tax flight?|
|What the GOP's tax plan will mean for different income brackets|