What Effect Might Trump Tax Plan have on Home Prices in California?

The recent income tax overhaul will affect more than just the bottom line on your tax form.

It might just influence individual decisions on the purchase of a home and possibly the overall direction of home prices.

In recent years, the good news for home prices has been nonstop –

• Rates have remained low for many years.
• Employment levels have been high.
• The availability of housing in high growth areas has remained limited.

But will these forces meet their match?

The new tax law includes features that could very well cost homeowners money, in the following ways that directly relate to their investment in real estate:

• The deduction for mortgage interest will be limited to only the interest on up to $500,000 worth of mortgage. The rest will simply not be deductible anymore.
• Your property taxes and state income taxes will be lumped together and your deduction for them will be limited to a total of $10,000 per year.

It is difficult to simply create a chart that will allow affected homeowners to determine the impact on a given taxpayer, but what is certain is that many homebuyers who are very close to the limit of what they qualify for will no longer be able to count on the kind of tax savings that would allow them to feel comfortable with a certain monthly payment. This group of buyers is a key part of the pressure that supports strong housing prices and they will no longer be able to afford to bid prices up as much as before. Families in the middle class supporting children over the age of 16 will also feel a powerful crunch as they will no longer be able to claim the significant tax deductions that previously applied to each child dependent of any age (the personal exemption). This is a group of buyers that is often in the same category of those that will benefit less from homeownership as described above and increases the deflation of buying power in the middle range of homes.

Families in the middle class supporting children over the age of 16 will also feel a powerful crunch as they will no longer be able to claim the significant tax deductions that previously applied to each child dependent of any age.

It is likely, therefore, that homes typically purchased by the middle to upper middle class – which benefit from higher balance conventional loans – will suffer in value. This would be the range of homes between $500,000-$800,000 that are typically financed through Freddie Mac and Fannie Mae loan products and are a primary driver of real estate price moves in high value areas like southern and northern California.

This year it is more important than ever to go in and run scenarios with your tax advisor.

Imagine how much better it would be, however, if your tax advisor is also a real estate/mortgage professional. At Financial Solutions/Preferred Partners Realty we work full time in both fields because we believe these disciplines require an intense knowledge of each other in order to provide proper service. Taxes are an annual chore as well as a daily fact of life. Real estate is the largest investment most people make. You can only hope to navigate these two key aspects of your financial life if they are considered in a joint and complementary way. That is what our firm offers and our reputation is staked on doing it at the highest level.

Use your resources.

If you need more guidance, take a look at our services or take time to schedule a consultation with our staff. We are here to help.