A heated bipartisan debate began earlier this month in the House and Senate over proposed changes to the Federal tax code. While it’s too soon to predict exactly how a revised structure will play out, tax incentives for homeownership are in jeopardy. How will reducing and maybe even eliminating tax benefits for owning a home affect our housing market?

How will reducing and maybe even eliminating tax benefits for owning a home affect our housing market?

I reached out to Robert Glatt, CPA at Glatt, Maney, Kling and Rufer to get his professional take. “Historically homeownership has been tied to tax breaks,” he noted. “The consumer thinks if I buy, I’ll save on my taxes while I also build equity. While I doubt that the tax reforms will be implemented to the extent they were announced, it’s entirely likely nonetheless that the psychology of buying will undergo a change.”




Of the proposed tax revisions, two are most significant for homeowners and would-be buyers: limiting the mortgage interest deduction and eliminating or capping the property tax deduction. Currently homeowners can write off both the interest paid on their mortgages as well as the property taxes paid on their homes to reduce their taxable incomes. 



The House bill aims to put new limits on how much mortgage interest can be deducted. The proposal cuts the current cap on loans by half from $1,000,000 to $500,000, and allows taxpayers to deduct the interest on one qualified residence only; adding the interest from a weekend home mortgage to add up to $1MM in loans would no longer be permitted. Nationwide fewer than 3% of outstanding mortgages are greater than $500K; however, in high-priced cities like New York, San Francisco and Los Angeles, property prices and accompanying loan amounts pale in comparison. Manhattan based Stephen Rybak at GuardHill Financial Corp says the loans he sees are averaging between $800K--$1MM. 



Homeowners who closed on loans before November 2, 2017, would be grandfathered and could continue to claim full deductions. You can bet, however, these property owners will be reluctant to give up their low interest, high deductible loans to move any time soon which means inventory will shrink, particularly for entry level buyers. The proposed change will impact owners of homes valued between $600,000 and $2MM the most, and these homeowners are more likely than not to stay put in their current residences. Additionally, the loss of the mortgage interest deduction will alter the middle market for second homes, at least for the short term, and will encourage these owners to consider renting as an option overselling. Loan refinancing will probably decrease as well should this be ratified.



Another blow to homeowners is the suggested elimination of property tax deductions or capping them at $10,000. Either way, modifying this “sacred cow” of real estate—the ability to deduct property taxes on income taxes—will change the bottom line for homeowners especially in high rate states like New York and California where these taxes can average more than $16,000.


The proposed reforms will have disproportionate effects on taxpayers. Despite promises from the current administration for a middle-class tax cut, it appears that those who earn less will feel the brunt of these changes more, especially those who reside in high tax, high cost states. High earners will be less affected.

If these tax changes are ratified, the rent vs. own cost comparison becomes blurred, and entry level buyers, especially millennials will remain renters longer.

Some buyers, wondering whether a dip in values will come with these reforms, are taking a wait and see stance at least for the short term. If buyers are prohibited from taking the deductions they were planning for mortgage interest and property taxes, they will have fewer after tax dollars to spend. Uncertainty will stall action, and it doesn’t help that this is occurring during the distractions of the holiday season when activity traditionally slows anyway. If these tax changes are ratified, the rent vs. own cost comparison becomes blurred, and entry level buyers, especially millennials will remain renters longer.

Photo by g-stockstudio/iStock / Getty Images


When the tax reform platforms were unveiled on November 2nd, shares of homebuilder stocks like Toll Brothers and Lennar dipped 6.1% and 3.3% respectively, but have since recovered, while brokerage Realogy Holdings fell 7% and continues to decline. Moody’s Analytics chief economist Mark Zandi cautioned that home prices could drop by 3-5% countrywide and by more than 10% in expensive suburbs.



Following the bill’s announcement, opposition was quick from industry groups. National Association of Home Builders Chief Executive Jerry Howard said, “The corporations are getting a major tax cut, and it’s getting paid for by the equity in American homes.” Echoing that sentiment National Association of Realtors President William Brown stated that the legislation “threatens home values and takes money straight from the pockets of homeowners…. eliminating or nullifying the tax incentives for home ownership puts home values and middle-class homeowners at risk.”



For sure factions and interest groups will put pressure on Congress to reach a compromise. New Yorkers will adapt to whatever tax reforms come, but some of the traditional motivation underlying buyer psychology is being challenged. Stay tuned as we watch this next chapter unfold.