Proposed caps on mortgage deductions may hit markets hard
PRICEY US housing markets from the New York suburbs to California’s coastal cities could take a direct hit under the taxreform bill released by House Republicans.
Under the bill, mortgage interest would be deductible on loans up to US$ 500,000 ( RM2.2 million) instead of the current US$ 1 million for couples filing jointly – weakening the incentive in high- cost markets where property deals often require large mortgages. The deduction would be rendered useless for many others as the standard deduction is doubled and state and local tax deductions are substantially downsised, diminishing the need to itemise.
The plan – touted by President Donald Trump, a billionaire who made his fortune in real estate – is sending the housing industry reeling, with some trade groups treating the bill as the most serious threat in decades. The National Association of Realtors said the initial memo released “appears to confirm many of our biggest concerns,” while homebuilder shares tumbled the most in almost a year.
In expensive markets such as the San Francisco Bay area, where home prices have soared in recent years and stretched affordability for many buyers, capping mortgage deductions would diminish an incentive used by purchasers to offset costs.
A limit to state and local property tax deductions at US$ 10,000 may particularly hurt states with high rates like New York and New Jersey, leading to pushback from congressional leaders from those areas, which tend to be Democratic leaning.
Mark Zandi, chief economist at Moody’s Analytics, said the tax changes could initially cut prices by 10 per cent in expensive markets and three per cent to five per cent across the US.
“You can see why the industry is not too excited by all this,” Zandi said. “It’s not good for home sales, house prices or new housing construction.”
About seven million homes, including a third of homes in California and 19 per cent in New York, would be affected by the mortgage-interest deduction cap if they were put on the market, according to a preliminary analysis by the National Association of Home Builders.
The number of households that itemise to take advantage of the housing deduction would drop to less than 11 million from 34 million currently, according to the group.
The plan could also limit home sales in other ways. Under current law, a couple who sells their home is able to exclude up to US$ 500,000 in capital gains from their gross income, as long as they used the home as their principal residence for two of the past five years.
Under the new plan, they’d need to use it as their principal residence for five of the past eight years to qualify. Instead of being able to use that exclusion every two years, they’d be able to use it only every five years.
High-income home owners might not be able to use the exclusion at all. Under the bill, the exclusion would be phased out by a dollar for every dollar a joint tax filer’s adjusted gross income exceeds US$ 500,000.
The NAHB, which represents small-home builders, has vowed to fight the bill after initially expressing support for the GOP plan before it was released, under the hope that other homeownership incentives could be added to the plan.
The National Association of Realtors, Washington’s secondlargest lobbying group, opposed the plan from the start. — WPBloomberg