The Tax Cuts and Jobs Act, an overhaul of the U.S. tax code enacted in 2017 that puts a cap on some deductions for homeowners, has “negatively impacted the housing market” by tamping down sales volume, according to a new study from the New York Federal Reserve. A slowdown in home sales from late 2017 through the third quarter of 2018 can be partially attributed to the changes in the tax law, in addition to interest rate hikes during that time, the study notes.
The 2017 tax law placed a $10,000 cap on deductions of state and local taxes, increased the standard deduction, and placed a $750,000 limit on the amount of mortgage debt that qualifies for interest write-offs. The New York Fed study did not look at the impact on home values or selling prices but focused on the impact to sales.
Buyers and owners who opt for the standard deduction are mostly unscathed by the lowering of the mortgage interest cap to $750,000—they no longer itemize, writes Kenneth Harney, a syndicated real estate columnist for The Washington Post. But homeowners in the upper brackets in high-tax areas are feeling it the most.
Lawrence Yun, chief economist for the National Association of REALTORS®, said in NAR's March existing-home sales reportthat tax policy changes continue to impact some markets. “The lower-end market is hot while the upper-end market is not,” Yun noted. “The expensive home market will experience challenges due to the curtailment of tax deductions of mortgage interest payments and property taxes.”
Mark Fleming, chief economist for First American Financial, says a new breed of consumers is emerging: “tax refugees.” These are homeowners who can no longer deduct beyond $10,000 and who are now heading to more tax-friendly locales in search of savings. They are creating “greater demand in the higher end of lower-cost real estate markets,” Fleming told the Post.
Source: “Overall, 2017’s Massive Tax Overhaul Hasn’t Hurt Home Values,” The Washington Post (April 27, 2019) and “Is the Recent Tax Reform Playing a Role in the Decline of Home Sales?” Federal Reserve Bank of New York (April 15, 2019)
