How the GOP Tax Plan will Affect Homeowners

The  Tax Bill recently introduced by Republicans in Washington is raising some concerns for Americans about whether or not they want to own a home.

The bill would limit the cap on deducting state and local taxes (SALT) down to $10,000 leaving many homeowners in the states with highest tax rates feeling quite wary about how much they’ll owe in taxes next year and the years to come. Many homeowners living in suburban cities pay more than $10,000 in property taxes yet have incomes around $75,000.

As a result of the tax bill slashing the corporate rate down from 35 percent to just 21 percent,  the GOP needed to find an alternative method they could use to raise taxes from different sources; This has been seen in the cuts in SALT deductions and lowering the mortgage interest deduction.   While the lower corporate tax rates should help stimulate the economy in a minor way there are serious trade-offs to consider for the middle class.

It’s not just the wealthy who will take a hit on homeownership.   Imagine the taxes you’d pay on your 2 million dollars home?   Yes, even the middle-class homeowners like those living in the suburban areas of major metros  will likely struggle as they feel the effects of not being able to deduct the full amount paid on property taxes

On the flip side, the cap would decrease home values due to high taxes, Especially true in the highly taxed states such as California, New York, and New Jersey.  The cap would very likely result in those markets depreciating in the value of the coming years.  One could make an argument that reducing home values in these markets could open the door to those who’ve been shut out of the home ownership game, but there will be middle-class families who feel the effects of the property tax changes.  The problem is making middle-class families aware of the increased tax liability for homeownership before they apply for a mortgage and potentially create another lending crisis.

With that said this tax cut has an excellent chance to create a 4% reduction in growth for home prices nationally by as early as 2019.  That is not to say that home prices will fall, but growth will see a 4 percent reduction.  For clarity,  if the market were to rise 6 percent this tax plan would cut into that increase by 4 percent reducing growth down to 2 percent.

This tax plan does not only affect buyers it will also affect new construction.  We should expect to see home construction slow along with handcuffed home values and property tax growth.   The entire tax incentive for owning a home will take a hit due to the reduced limits on mortgage interest deductions, the SALT changes above as well as the higher standard deduction.  Which signals a reduction in home sales and connection the demand for new homes to be built.