Which Real Estate Market Will Be Hit The Hardest By The Tax Bill?

The tax bill will affect the real estate market minimally in the higher-priced areas like California, New Jersey, New York and Connecticut. These are among the states where homeowners benefit from being able to itemize mortgage interest, property tax and state income tax. Raising the standard deduction to $24,000 (married filing jointly) from the previous $13,000 means that fewer people will itemize because the standard deduction will be larger than the sum of the deductions. Some specific examples (I will use married filing jointly as the filing status for all examples): Married couple earning $75,000, no children, no itemized deductions. Their tax bill will drop temporarily by $1,363. If the couple happens to have bought a home for $350,000 and a 20% down payment, they’d benefit from itemizing under the old tax law, but not the new. Their tax bill will drop by $692. If the same family have two children and own their home, their tax bill will drop by $1,447 because of the temporary increase in the child tax credit, to $2,000 from $1,000. If they earn more money—let’s say $120,000 but own the same modest home, they’ll pay $210 more. The child tax credit in both cases will have largely phased out. If the same family of four has a more expensive home, $650,000 with a $520,000 mortgage, they’ll itemize in both cases, but their taxes will still be $1,477 higher under the new law. This is because of the loss of the personal exemption ($4,150 per person) and the limitation of the amount of property tax and state income tax that can be deducted. With all that said, it has been my experience in nearly four decades of participation in the real estate industry both as broker and as lender, that few people make a decision to by or not to buy based on tax deductions. Surprisingly few people understand how income taxes are calculated, and even fewer understand how interest and property tax deductions figure into their financial picture. I would be far more concerned about the use of an increased deficit as an excuse to slash “entitlements” such as Medicare, Social Security and Medicaid. Additionally, the Congressional Budget Office has already weighed in on the effect of the repeal of the individual mandate: health insurance premiums will increase by at least 10% when there are fewer healthy people in the insurance pool.

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