Taxing Times for Hot Markets

The Tax Cuts and Jobs Act has made significant changes to the longstanding tax benefits of homeowners with the cap on borrowing being reduced from $1 million to $750,000, while deductions for state and local taxes, including property taxes, have been capped at $10,000. According to a study by ApartmentList.com, these changes will hit some of the most expensive housing markets the hardest.

The study looked at county-level home values across the U.S. and analyzed the impact to owners with home values below, at, and above the median price of their local markets. Based on this data, the study found that in markets such as California, Washington, and New York owners of the county’s least expensive homes could also lose deductions under the new law. These coastal markets with a combination of high property values and high local tax rates had the most to lose.

However, the study pointed out that in the near-term, homeowners who lose housing tax benefits were not necessarily worse off. “Because of the higher standard deduction, some of the households that lose homeowner benefits will still see a reduction in their overall tax bill. For these households, the biggest implication for the housing market is a shifting of incentives away from homeownership,” the study noted.

Homeowners in San Jose, San Francisco, Los Angeles, Oxnard, and San Diego—all cities in California would be the hardest-hit, suffering the first-year loss in housing tax deductions between $3,600 and $5,400 depending upon the median value of their home. Over a 30-year period (which is the average period for a mortgage), the study found that these homeowners stood to lose between $48,000 and $114,000.

Interestingly, of the 10 hardest hit metros in losing housing tax deductions, four were in the Northeast and included Bridgeport, Connecticut; Boston, Massachusetts; Washington, D.C.; and New York, New York. The only other state that featured on the list was Honolulu, Hawaii that came sixth on this list.

Though not as badly hit as their Californian counterparts, the study found that homeowners in these Northeastern cities could suffer a first-year loss of housing tax deductions between $1,500 and $1,700. Over a 30-year mortgage period, these losses would amount to anything between $19,000 and $39,000.

To read the complete study, click here.