Impact for Bay Area First Time Buyers From Proposed Tax Changes


San Francisco home buyers could be impacted by the upcoming Tax Bill


Bay Area First Time Buyers will be impacted by the proposed tax changes.  Here are some of the changes that will affect individual ownership of real estate:

• Lowering the cap on mortgage interest deductions on newly issued loans totaling no
more than $500,000, down from the current $1 million
• Ending deductions on second homes or vacation homes
• A new cap of $10,000 on property tax deductions
• Limits to the capital-gains exemption used by homeowners when they sell

The impact would be particularly severe for households with incomes between $100,000 and $200,000 — 30 percent of Bay Area households.

• Limiting the mortgage interest deduction to $500,000 impacts 70 percent of Bay Area home sales.
• Buyers with a new mortgage of $1 million would lose $20,000 in deductible mortgage interest in the first year.
• Putting caps on new buyers and placing further limits on capital-gains exemptions would
discourage current homeowners from selling, further intensifying the inventory shortages that
are plaguing the region.

The proposed tax changes could be more disadvantageous for those with incomes over
$75,000, who comprise two-thirds of itemized filers and one-third of California returns.

• In the Bay Area, about 46 percent of households earn more than $100,000 and about 30 percent earn between $100,000 and $200,000. Also, home prices in the Bay Area are well above $625,000, which means that the mortgage interest deduction cap (assuming a $500,000 mortgage loan with 20 percent down) would be more impactful.

• Further, while the mortgage interest deduction averages $12,283, and 24 percent of all returns
deduct the mortgage, the proposed changes are more impactful on the future homebuyers and the housing market in general since the proposed changes would apply to newly originated mortgages.

Over the last year, 70 percent of Bay Area homes sold were priced above $625,000, and 30 percent were priced higher than $1.2 million.

Those two price benchmarks represent mortgages between $500,000 and $1,000,000, with an assumed 20 percent down payment. Thus, 70 percent of home sales are at a potential loss from changes to the mortgage interest deduction. Granted, about 26 percent of transactions below $1 million were all cash in the Bay Area, according to Pacific Union’s recent analysis; however, that share was smaller in markets such as San Francisco, Silicon Valley, and the East Bay.

All-cash buyers are more likely to purchase homes priced above $2 million, and only 13 percent of cash buyers were first-time buyers. 

Nevertheless, the lower cap on the mortgage interest deduction would be particularly detrimental to first-time buyers in in the Bay Area. For example, a buyer of a $1.2 million home with a $1 million mortgage would pay almost $40,000 in amortized interest in the first year. However, at the $500,000 mortgage interest deduction cap, the buyer would be able to deduct only half of that interest, thus losing about $20,000 in deductions.

Again, if this is a first-time buyer and likely to fall in the income range of between $100,000 and $200,000 in the Bay Area, the loss of a $20,000 mortgage interest deduction would make a notable difference, not only in the resulting tax bill but also on the decision to purchase a home. Also, note that while the proposed tax plan reduces the number of brackets, not everyone’s tax rate will decrease, and these deductions will play a big role in where a household falls along the income spectrum.

A $10,000 cap on real estate property taxes would also impact those buying a home priced above $1 million since California property taxes generally average about 1 percent.

Again, in the Bay Area, 36 percent of home sales year to date were priced higher than $1 million. For example, a buyer of a $3 million home would lose $20,000 in property-tax deductions. Six percent of San Francisco sales and 7 percent of San Mateo County sales are priced above $3 million.

Ultimately, we may or may not see some form of tax reform pass.

Admittedly, the changes discussed here are somewhat simplified, and not all proposed changes have been evaluated. Also, this analysis does not include the potential impacts on corporate taxes, charitable deductions, or pass-through organizations. Overall, we would urge caution moving forward with the proposal as it currently stands.