A study conducted by the Anderson Center for Economic Research and Hoag Center for Real Estate and Finance examines the potential impact of the Republican-sponsored House tax-overhaul bill (House bill) on the median home price in California as well as every California county.
Although the House Bill grandfathers mortgage interest deductions up to $1,000,000 for current homeowners, new caps are proposed on housing-related deductions for homebuyers of existing or newly built homes. Those include a new cap on the mortgage interest rate deduction of $500,000 instead of the existing $1,000,000. The House bill also proposes that the deductibility of property taxes paid be capped at $10,000 for new and current homeowners.
In addition to these recommended changes, the House bill calls for other revisions, including changes in tax rates and standard deductions, the elimination of the personal exemption, the elimination of the alternative minimum tax (AMT) and an end to the deductibility of state and local taxes.
This study is based on the assumption that homebuyers evaluate the beneficial tax consequences of purchasing a home and are willing to pay more for a home to reap the resulting tax benefits.
Table 1 below presents the following data relating to the impact of the House bill on a median- priced home in California:
- The median-priced home is currently $478,800 for single-family homes and condominiums (1).
- To qualify for a 30-year mortgage with the required down payment, the minimum median family income level is $87,900 (2).
- Based on the existing federal tax code with existing home-related deductions in place, the study’s findings suggest that a family with the required income of $87,900 will save $18,700 (3). That is the present value federal tax savings over a 30-year period.
- Under the proposed House bill tax regulations and its caps on home-related deductions, the present value of the tax savings from buying the $478,800 home drops to zero, since a California couple, at a median income level of $87,900, is better off taking the new higher standard deduction than taking any home-related mortgage deductions (4).
- Buying a home under the House bill tax regulations will, therefore, result in a loss of home-owner tax savings of $18,700 (5).
- If the tax savings from buying a home declines as a result of the proposed revisions in deductibility, so too will the amount a family will be willing to pay for that In the case of a median-priced home of $478,000, a decline in price of $18,700 represents a drop of 3.9% (6).
|Table 1. Impact on California Median Home PriceResulting from Loss of Tax Benefits in Proposed House Bill|
Median Home Price
|Present Value of Existing Home-Related Deductions||Present Value of Proposed Home-Related Deductions||Net Loss (Column 3 Less
|Impact on Median Home Price|
The accompanying Table 2 uses the methodology described above on a county- by-county basis. The counties are ranked in order of lowest to highest median home price. The projected housing price depreciation that would result from the loss in home-related deductions in the House Bill ranges from zero for counties like Siskiyou and Shasta to a high of 13.0% in counties like San Francisco and the Westside and West of Los Angeles.
It might be argued that grandfathering current home-related tax deductions for existing homeowners in the proposed tax plan will limit the potential losses (gains) in home values. That is not the case. Home prices are largely set by new transactions that will reflect the changes under the proposed tax plan, since new homebuyers will be subject to the new caps on mortgage and property tax deductions.
Since selling a home means a loss in potential home-related tax deductions, resale activity will likely decline, reducing the supply of homes for sale. But demand will also decline, since potential homebuyers will have an incentive to stay in their current homes in order to continue benefitting from the housing deduction of the grandfathered provision. New homebuyers will therefore be forced to more narrowly rely on newly built housing to a greater extent. Although these trends are national in scope, the dynamic changes outlined here will be far greater in areas where incomes and housing prices are higher.
|Table 2. Impact on Median Home Price in California Counties Resulting from Loss of Tax Benefits in Proposed House Bill|
|PresentValue of Existing Home-Related Deductions||PresentValue of Proposed Home-Related Deductions||Net Loss (Column 3 Less
|Impacton Median Home Price|
|San Luis Obispo||$569,500||$104,537||$39,009||$1,999||$37,010||-6.5%|
|Los Angeles (Westside & West LA)||$1,233,929||$226,498||$183,406||$23,408||$159,997||-13.0%|
A study conducted by the Anderson Center for Economic Research and Hoag Center for Real Estate and Finance examines the potential impact of the Republican-sponsored House tax-overhaul bill (House bill) on the tax rates paid by California married couples filing jointly at various income levels. The study also analyzes how the House bill will affect the federal income tax rate for homeowners as compared to non-homeowners as a result of the House bill’s proposed caps on mortgage interest and property tax deductions. It is the first university-based research analysis that measures the impact of removing the deductibility of state income and sales taxes by family income level and whether a family owns or does not own a home.
Consistent with available statewide averages, it is assumed for current homeowners that the loan-to-value is 60 percent, that 18 years remain on the existing mortgage and that the mortgage interest rate being paid is 4.3 percent. For family incomes under $100,000, the House bill will result in tax rates about one-half to one percent lower than current rates. From $100,000 to $600,000, the differences in tax rates are minimal. At income levels above $600,000, however, the loss of state and local income tax deductibility and cap on the property tax deduction under the House bill affects tax filers whose itemized deductions are greater than the standard deduction. As a result, these current homeowners will pay higher tax rates under the House bill. For example, at incomes of $3 million, the current tax rate of 30.4 percent increases to 36.1 percent.
Closer scrutiny of income levels below $600,000 reveals subtle winners and losers. At income levels under $100,000, the drop in tax rate is a direct result of the proposed increase in the standardized deduction to $24,000, which exceeds both the current standardized deduction plus personal exemptions and home-related itemized deductions. For income levels between $100,000 and $250,000, the slight increase in tax rate is attributed to the loss of deductions relating to state and local tax, personal exemptions and cap on property tax. On the opposite side of the spectrum, for income levels between $250,000 and $600,000 a slight decline in the tax rate is attributed to the benefit from the proposed elimination of the Alternative Minimum Tax, which exceeds the loss of the deductions mentioned.
For families that are not current homeowners but purchase a home after the House bill goes into effect, tax rates increase at lower income levels. The major reason for this is that the proposed caps on mortgage interest and property tax deductibility affect families at incomes starting at $100,000 with mortgage loans greater than $500,000. At incomes less than $100,000, the proposed standard deduction of $24,000 exceeds home- related itemized deductions. This effectively eliminates any tax benefit to homeownership at these low-income levels.
For those who are not homeowners, the tax rate under the House bill is about 2 percent lower than current rates for incomes below $600,000. For incomes between $600,000 and $1 million, there is little difference in rates under the current tax code or House bill. This is due to an equal tradeoff between the loss of state and local tax deductions and the gain from the proposed change in tax brackets that triggers the highest tax rate, 40 percent, at income of $1,000,001 as opposed to the current tax code’s trigger of $470,701.
Above $1,000,000, however, the House bill results in higher tax rates.
The overall findings of the Anderson Center and Hoag Center show that the tax advantages of owning a home are sharply reduced but not wholly eliminated under the House bill. This is particularly the case for families with income levels above $100,000, who count on mortgage interest and property tax deductions to maximize their itemized deductions to achieve the lowest possible effective tax rate.
The tax benefits of owning a home largely disappear for new homebuyers under the House bill. This is the direct result of increasing the standardized deduction and the new much lower caps on mortgage interest and property tax. At income levels of $100,000 and under, the tax benefit of homeownership is effectively eliminated due to the proposed increase in the standardized deduction to $24,000. The total home-related itemized deductions are less than the proposed standardized deduction, and this results in homeowners and non-homeowners paying effectively the same tax rate. For income levels over $100,000, there is a small and caped tax benefit to homeownership. The proposed lower caps on mortgage interest and property tax result in a home-related itemized deductions cap of approximately $31,000 (assuming a mortgage rate of 4.3 percent), which is reached at income levels of $150,000 and higher. In other words, the most that a family can reduce its taxable income beyond the standardized deduction because of homeownership is $7,000 ($31,000 – $24,000). The resulting tax savings are modest at all income levels and decline as gross income rises. For example, at an income level of $1,000,000 and the 40 percent tax bracket, the tax savings is $2,800 ($7,000 x 40 percent), representing 0.28 percent of gross income. At an income level of $150,000 and the 25 percent tax bracket, the tax savings is $1,750 ($7,000 x 25 percent), representing 1.2 percent of gross income. Current owners, however, incur a higher level of savings because the House bill preserves the higher cap on mortgage interest deduction for current homeowners.
The Impact of Tax Reform on California Families in a Changing Mortgage Rate Environment
A study conducted by the Anderson Center for Economic Research and Hoag Center for Real Estate and Finance examines the potential impact of the Republican-sponsored House tax-overhaul bill (House bill) on the tax benefit of homeownership in an increasing mortgage interest rate environment. Currently, the mortgage lending industry anticipates an increase as high as 1% in mortgage interest rates in the next two years. The findings of this study suggest that such an increase in mortgage interest rates would have minimal impact on the tax benefit of homeownership, if any.
In an earlier study by the Anderson and Hoag Centers, the results showed that the tax benefits of owning a home largely disappear for homebuyers under the House bill. This is a direct result of increasing the standardized deduction and the newer much lower caps on mortgage interest and property tax. In that study, income levels below $90,000 realized no tax benefit from homeownership (Table 1 Column a). For income levels of $90,000 and higher the tax benefit from homeownership represents less than 1% of gross household income. The highest level of tax savings, 0.9% of gross household income, is realized by those with household income ranging between $200,000 and $300,000. The lowest level of benefit is realized on both ends of the income spectrum. At an income level of $90,000, the tax benefit is 0.07% of gross household income. At income levels of $3,000,000 the benefit is 0.09% of gross household income.
Comparable results are observed in a mortgage interest rate environment 1% higher than current rates. The threshold income level for realizing a tax benefit from homeownership, however, drops from $90,000 to $75,000. At an income level of $75,000, virtually no tax benefit ($35) is realized from homeownership (Table 1 Column b). Furthermore, as would be expected, higher income levels realize greater tax benefits. Those benefits, though, remain under 1% of gross household income for most income levels. The chief beneficiaries of the tax savings, at the higher mortgage interest rate, are families with an income level between $150,000 and $300,000. At an income level of $150,000, the tax savings approximately doubles to 1.7% of gross household income. At income levels move away from the $150,000, the tax savings decline reverting back to a tax benefit under 1% of gross household income.
Overall, the Anderson and Hoag centers study suggests that an increase in mortgage interest would have a positive impact on the tax benefit of homeownership for most income levels. The change as a percentage of gross household income, however, remains meaningfully low. At an income level of $85,000, an increase in the mortgage interest rate of 1% generates a change in tax savings of 0.5% of gross household income. While, at an income level of $3,000,000, a similar increase in interest rate generates a change in tax savings of 0.07% (Table 1 Column c).