Last week, House Republicans released their proposed Tax Cuts and Jobs Act. The bill is intended to cut taxes for the middle-class, simplify the tax code and create jobs. Release of the Senate version is expected this week.
Of particular interest to Beach City residents is the impact on local home prices, resulting from potential changes to certain deductions. Like the current tax code, the answer to this is complex and depends on a number of factors.
Two proposed modifications that would affect homeowners are the caps on both the mortgage interest and property tax deductions. What is presented here is in no way comprehensive, but rather summarizes how some homeowners might be affected.
Currently, homeowners can deduct interest payments on their first $1 million of home loans. The proposed tax plan drops this cap to $500,000 on new home purchases. (Existing homeowners would not be affected.) This change translates to about $20,000 in interest that will not be deductible. Additionally, the plan calls for a $10,000 limit on the amount of property tax that can be deducted, which would impact homes valued at over $800,000.
The impact on homeowners will depend on the amount of their loans and the purchase price of their homes. The average home sales price in Redondo Beach over the past five years was $1.2 million and so it is possible that the majority of the more than 4,100 homes that changed hands involved loans of $500,000 or more. Given that 56 percent of housing units in Redondo are owner-occupied, this represents an approximate turnover of 25 percent in five years.
If we use a sale price of $1.2 million to illustrate the impact of the new deduction caps, a buyer would lose about $20,000 of interest deductibility, depending on the down payment amount. The buyer would also lose about $4,400 in property tax benefit. This translates to a net income loss of approximately $600 monthly, depending on individual or household tax brackets. As a result, a buyer might lose $20,000 in home purchasing power under this scenario, an amount that probably isn’t sufficient to impact future home sale prices.
Manhattan Beach sales would feel the impact more. In the past five years, close to 2,000 homes were sold at an average price of $2.4 million. The effective drop in income for a buyer of a $2.4 million home because of the tax changes would be about $950 monthly. This might impact home buyers’ purchasing power by $50,000.
Of course, there are other considerations in the proposed tax bill such as the change in tax rates that could offset some of this net tax increase. John Chuka, the owner of NW Real Estate Brokers in Manhattan Beach, with a total of 80 agents, said that “any cap on mortgage loan deductibility is a negative.” However, he added, “Many of our beach cities clients rely secondarily on the current deduction.” When coupled with the incredible appreciation rates that we have been experiencing here, Chuka added, “I think most coastal area buyers will consider this loss of deductibility a less than important issue in the grand scheme of buying while others will consider the deduction gap a greater negative when buying in other areas with loans exceeding $500,000.”