The tax bill, signed into law by President Trump last Friday, dropped the loan amount on which interest could be deducted from $1 million to $750,000.
The change will affect mostly those buying or making house payments in the high-end market or in parts of the country where prices for even modest homes are very high. Some national analysts have said the deduction change could tamp down home values or sale prices, with buyers less inclined to spend as much with a reduced mortgage-deduction break on federal taxes.
According to data from the Santa Fe Association of Realtors’ quarterly reports, about 1,500 single-family homes were sold in and around Santa Fe in 2016. Donna Reynolds, the organization’s government affairs director, said about 6.5 percent of those sales were in the $1 million-or-more range, where buyers are most likely to be affected by the tax code changes,
But Kim Shanahan, director of the Santa Fe Homebuilders Association, said the lower deduction limit likely won’t have a profound effect on the local high-end market. He said many of those deals are done in cash – with no loans or mortgage interest involved.
“You’re going to find a lot of these high-end homes don’t have a regular mortgage,” said Shanahan.
He said cash purchases can result from people selling their longtime homes and using the money to buy something in Santa Fe for retirement or come from wealthy buyers who just have the dollars for an expensive house.
But Melissa Pippin-Carson, president of the Realtors association, said she is expecting a ripple effect that could “dampen” the area’s strong luxury and second-home market.
Even though more than half of Santa Fe area’s $1 million-plus deals are indeed done in cash, she said, buyers in the other half will take out a mortgage to spread the cost out and not “liquidate” their retirement.
Now, those buyers may think twice about a big mortgage or purchasing altogether. The fact that the cap goes toward both first and second homes – the $750,000 interest deduction is cumulative, not for each house – is also an issue in the Santa Fe market, she said.
Pippin-Carson said it’s hard to predict the impact of the deduction change now and she doesn’t think it will slash home sales drastically.
But she added that “if it affected one out of every five sales, there’s potential there.”
Other tax changes
There are other parts of the new tax code that could hit home sales.
One is a new $10,000 cap on state and local tax deductions, including property taxes.
Pippin-Carson said many second-home buyers in Santa Fe come from high-tax states like New York and California. If they can write off fewer taxes in their home states and also face a reduced mortgage deduction on a Santa Fe home, she said, that’s another factor that plays into a decision to buy or not.
Shanahan and Pippin-Carson agree there’s also a potential downside for real estate in the tax overhaul’s doubling of standard income tax deductions for taxpayers.
For singles, the plan raises the standard deduction from about $6,300 to $12,000. For married couples filing jointly, the standard deduction goes from $12,000 to $24,000.
That will likely reduce taxes for many. But with bigger standard deductions, fewer taxpayers will choose to itemize write-offs like medical expenses, charitable donations, local taxes – and home mortgage interest payments. Both Shanahan and Pippin-Carson said that could tamp down the incentive to buy over renting.
“If they feel like there’s no true benefits, you have a nation of home renters, and that creates a problem,” said Pippin-Carson. She said renting means less of a chance to accrue wealth over time by investing in a piece of property long-term.
Some critics see the home mortgage interest tax break as an unnecessary subsidy for the real estate industry that benefits the wealthy more than others. During Congress’ deliberations on the new tax code, the House of Representatives wanted to cut the home interest tax break in half to a maximum of $500,000.
Pippin-Carson said any cut in the deduction opens the gates for the government to continue lowering it.
“It’s the idea that we’ve reset … . It’s so much easier to go ahead and whittle it further,” she said.