The first draft of the House tax reform bill, dubbed the “Tax Cut and Jobs Act,” was unveiled last week and already is undergoing revision. So it’s hard to predict what the final measure will include – and whether or not it will pass.
But in its first iteration, the bill would impact homeowners in various ways, especially homeowners in high-cost states such as California.
Industry groups including the National Association of Realtors, the National Association of Homebuilders and the American Institute of Architects are pushing back.
“This legislation closely tracks with the House Republican Blueprint for tax reform, which threatens home values and takes money straight from the pockets of homeowners,” said NAR President William E. Brown, a second-generation Realtor from Alamo.
“Realtors believe in the promise of lower tax rates, but this bill is nowhere near as good a deal as the one middle-class homeowners get under current law. Tax hikes and falling home prices are a one-two punch that homeowners simply can’t afford.
The most impactful provisions include:
• The bill cuts in half the mortgage interest deduction and limits it to mortgages on primary residences only.
• Places more stringent limits on who can claim the capital gains exclusion when selling their home.
• Limits the deduction for state and local taxes, including property taxes, to $10,000. About one-third of California taxpayers take that deduction.
• Eliminates the deduction for personal casualty losses, such as from earthquakes or wildfires.
• Eliminates the deduction for moving expenses.
The industry also objects to the doubling of the standard deduction, predicting it would reduce the number of homeowners who would claim the mortgage interest deduction, thus reducing the incentive for renters to purchase a home; and to the elimination of deductions for medical expenses and interest on student loans, which would make it harder for would-be buyers to qualify for new mortgages.
The national homeownership rate is already near the all-time low at 63.7 percent.
“The nation’s 1.3 million Realtors cannot support a bill that takes homeownership off the table for millions of middle-class families,” Brown said in a statement.
So what are the specifics of these changes and how would they impact real homebuyers and sellers?
Currently, homeowners can deduct the interest on mortgages on their primary and secondary homes of up to $1 million. The new proposal would reduce that to interest on mortgages of the primary residence only up to $500,000.
While a $500,000 mortgage goes a long way in many states – the median home price nationally is $245,100 – in California, New York, New Jersey and other high-cost areas, $500,000 does not go very far.
In fact, the current median list price for Livermore, Pleasanton and Dublin is over $1 million. Only two properties – both one-bedroom one-bath condos – are offered for sale for less than $500,000. A total of nine properties are priced below $620,000, which is the price at which a $500,000 mortgage would apply if a buyer had 20 percent for the downpayment. Of those, only one is a detached home.
Prices are even higher in other parts of the Bay Area.
The new law would not impact existing mortgages, but would affect new mortgages. Buyers purchasing their primary residence who entered a binding purchase agreement before Nov. 2 which is scheduled to close before Jan. 1, 2018, are also exempt, as long the contract closes before April 1, 2018.
Jerry Howard, CEO of the National Association of Home Builders, estimated that 7 million homes would be excluded from the mortgage-interest deduction, including about one-third of homes in California.
“You’re talking about potentially causing housing recessions in some of the biggest markets in the country, and those kinds of recessions tend to have spillovers,” Howard said. “We’re worried about a national housing recession.”
Between the changes to the mortgage interest deduction and the cap on property tax deductions, homeowners will have less incentive to move, thus creating fewer opportunities for first-time homebuyers to enter the market.
The 75.4 million Millennials (ages 18-34) in the U.S. are already buying homes at a lower rate than previous generations, due to high prices, low availability and high student debt. Industry specialists fear these tax changes will add more barriers to entry to homeownership.
Proposed changes to the capital gains exclusion also are expected to disproportionately impact first-time homebuyers.
Under existing tax law, homeowners who sell their primary residences can exempt $250,000 ($500,000 for a married couple) from capital gains taxes, provided they have lived in the home two of the past five years.
The current proposal would limit that exemption to homeowners who have lived in their homes for five of the past eight years.
This works fine for the average homeowner, who will stay in the same dwelling for seven to nine years. But average isn’t everyone, and first-time homeowners are more likely to move after only a few years.
For example, twenty-somethings Taylor and Matt got married last spring and purchased their first home, a two-bedroom, one-bath condo in Pleasanton. They are expecting their first child in May.
The plan was to live there two years, build equity and savings, then sell the condo and purchase a house in which to raise a family.
The new rules would hit them hard. They will have to choose between staying in this small condo for five years or selling and taking the tax hit.
All of this, of course, depends on the bill actually passing. The Republicans, with a slim majority in both houses, are fighting hard to get something on the president’s desk before the end of the year.
Industry groups are fighting just as hard to ensure homeownership is protected in any law that is passed.
NAR has launched a user-friendly online system for homeowners to ask their member of Congress to preserve the tax benefits of homeownership. For more information, check out http://homeownershipmatters.realtor/taxreform/
Cher Wollard is a Realtor with Berkshire Hathaway HomeServices Drysdale Properties in Livermore.