How Tax Laws will Affect Home Prices

How will the new tax laws affect San Diego real estate prices? The new tax law is expected to create winners and losers nationwide as well as right here in San Diego. The new federal tax laws are significant and will clearly cause consequences.

The first major issue is that the federal deduction for California state income taxes and property taxes combined is now limited to just $10,000. This will clearly put downward pressure on coastal real estate prices. Many buyers that head for the coastal cities, such as Point Loma, Ocean Beach, Pacific Beach, La Jolla, Del Mar, and Solana Beach are dual income households who are typically stretching a bit to afford a $1,000,000 to $2,000,000 home for their family. I represent a few buyers in this category. Consider a combined income of $250,000 for a couple purchasing a $1,500,000 house with 20% down. Property taxes would start at around $17,000 per year and state income taxes would be around $10,000 or more for this couple. That is a combined federal tax deduction of approximately $27,000 in 2017. However starting this year that deduction is limited to just $10,000. This will no question reduce demand for higher end properties.

A second whammy is that mortgage interest is now limited to just the first $750,000 of principle. On the above example, that would limit the couple’s 2018 interest tax deduction to around $37,500 from an interest deduction of around $60,000 in 2017. These changes are drastic and will discourage many buyers from moving up to more expensive homes. Many buyers in this category will simply stay put. This could put a drag on real estate prices throughout San Diego County as real estate prices tend to rise and fall together for all areas of San Diego. Additionally, when people move from the inland communities to the coast, that then allows for another family to move into an inland home. When real estate sales stagnate on the coast that would probably have some downward pressure on inland home sales.

However, some say neighborhoods with average home prices below around $800,000 could benefit through increased demand for that sweet spot of a home price which allows for a full deduction on mortgage interest with a nearly full deduction on state income and property taxes. Areas such as Del Cerro, Mount Helix, parts of the College Area, Talmadge, College View Estates, and Kensington as well as North County for example could benefit from strong demand and resilient home prices.

Another negative for homeownership is that the standard deduction has been doubled giving renters similar tax deductions to homeowners. While this may certainly be equitable, it does put a drag on homeownership incentives. Homeownership has typically given a homeowner a substantial tax savings over that of a renter, but not anymore. The incentives to purchase and maintain a home are drying up. Already millennials have a lower home ownership rate than their parent’s generation. With less buyers in the marketplace, demand and prices could be subdued.

There are still excellent reasons to own property, such as, substantial long-term appreciation, a fixed monthly housing payment, and pride of ownership. Please call me to schedule a no obligation meeting to discuss the purchase or sale of San Diego real estate.