Seemingly overnight, real estate forums and blogs exploded. After months of equivocation and will-they, will-they-not consideration, the GOP tax plan finally seems ready to pass into legislation – causing buyers, sellers, and real estate professionals alike to leap into frenzied discussion about the market’s future.
What will the newly-minted tax plan do to market prices and home-buyer attitudes? Will this uplift the real estate market, or tank it?
The answer isn’t as cut-and-dry as one might hope.
If you’ve spent any time flipping through the newspaper lately, you’ve probably come across a headline railing against the plan’s minimization homebuyer’s ability to deduct their mortgage interest from their taxes. Under the current tax code, homebuyers who itemize are able to deduct interest on loans up to $1 million; under the GOP plan, they would only be able to do so on loans up to $500,000. Opponents of the cut argue that current policies help homebuyers pay for their homes and that the new plan de-incentivizes buyers. On the other side of aisle, proponents point out that this mortgage deduction both inflates housing prices and encourages buyers to overreach on loans.
Which is right? As it turns out, the answer doesn’t actually matter all that much. The majority of homeowners opt out of itemization and choose to use a standard deduction when filing. Only 20% of American homeowners claimed a mortgage interest deduction in 2015, for an average tax deduction of $8,600; only 5% of all mortgages were for loans over $500,000. Under the new tax plan, buyers have even less reason to itemize, given that the standard deduction is set to double: now, single filers can file for a standard deduction of $12,000 and married couples for $24,000. For all the media hubbub over the slashed mortgage deduction, the revised cap won’t actually have a significant impact on the vast majority of American homeowners. As Ken Johnson, a real estate economist at Florida Atlantic University in Boca Raton comments in a Realtor.com piece on the subject: “On a scale of 1 to 10 on if interest deductibility is going to have a big impact on housing, it’s a 2.”
For all intents and purposes, the mortgage deduction cut is a flash in the metaphorical pan – sparking some debate, but not significant enough to light conversational fires. Other parts of the bill, however, aren’t so unthreatening.
Under the GOP plan, homeowners will only be able to deduct up to $10,000 in property tax – and won’t be able to deduct their state and local sales and income taxes at all. Moreover, these caps aren’t engineered to account for inflation, opening the door to further hardship down the line. All told, these changes could prove devastating to those living in regions such as California, and New York, both of which have high property values and high income taxes. We will likely see buyers in these high-burden regions steer clear of homebuying and turn to renting, which will in turn drive rental prices up as the ready pool of housing units dries up.
As a Pittsburgh-based real estate agent, it seems logical for me to turn and consider my own state. Pennsylvania tax code sets a flat income tax rate of 3.07% and a sales tax of 6%. When compared to California, which has a sliding-scale system that taxes the lowest income bracket (under $7,850/year) at 1% and the highest bracket (above $526,400/year) at 12%, this doesn’t seem all that bad. Moreover, Pittsburgh’s houses are reasonably priced, at a median cost of $125,700. Though time will tell what the true impact of the new tax plan will be, areas such as Pittsburgh will likely pull through unscathed. The true trials will happen in states like California and New York, where matters might only be made worse.
Jason Cohen is the founder of Jason Cohen Pittsburgh, a informal real estate advising group. For more information about Jason and his work, please visit his website at JasonCohenPittsburgh.org.