The Tax Cuts and Jobs Act has been signed into law. There were some big “wins” in the final bill from the perspective of homebuyers, owners, and real estate investors. However, the bill removes important incentives for homeownership and may have an adverse impact in some markets. According to the National Association of Realtors, home prices will grow at a slower pace of 1-3% nationally. Unfortunately, some local markets in high cost, higher tax areas will likely see price declines. One such county, Santa Cruz, is predicted to be one of the five metro areas in the country that will be most affected by the new tax law.
“Wins” for Real Estate
- The final bill did not modify the current law on the exclusion on the gain of sale of a principal residence. The current law states that, to qualify for at $250,000 (single) or $500,000 (married) exclusion on the gain of sale of a primary residence, a homeowner must have resided in a property for 2 out of the previous 5 years. The Senate-passed bill would have stipulated that homeowners must live in their home for 5 out of the past 8 years to qualify. The change would have likely further restricted housing supply in an already constrained market locally and nationwide.
- Interest remains deductible on second homes, but is subject to the $1 million / $750,000 limits (see below). The House-passed bill would have eliminated the deduction for second homeowners. While not as drastic as the House bill, this change may still dampen the demand for Santa Cruz real estate. Locally, second-home buyers have been trending upwards over the past two decades and the average home price is well over $750,000 in most areas of the county.
- The final bill allows an itemized deduction of up to $10,000 for the total state and local property taxes and income or sales tax. While less favorable for homeowners than the previous law, this was a major improvement from the House and Senate bills which proposed complete elimination of state and local taxes.
Cap on Mortgage Interest Deduction
- The Tax Cuts and Jobs act reduces the limit on deductible mortgage debt to $750,000 for new loans taken out after 12/14/17. Current loans of up to $1 million are grandfathered in and are not subject to the new $750,000 cap. This is one of the most important and potentially deleterious changes for the Santa Cruz Real Estate Market. According to Zillow Group Policy Advisor, Alexander Casy, capping the deductions could contribute to slower home value growth in the priciest communities by limiting some buyers’ purchasing power. Santa Cruz is one such community, and will be disproportionately affected.
- Interest paid on home equity loans (second mortgages) through 12/31/25 will not be deductible unless the proceeds are used to substantially improve the residence. Typically, this kind of deduction is important for financing major home renovations, so eliminating it could contribute to underinvestment in home repair and updates.
- The standard deduction will be doubled from $6,350 to $12,000 for single filers and from $12,700 ro $24,000 for couples filing jointly. This change will have a significant impact on the number of homeowners that decide to take advantage of the mortgage interest deduction. According to a study by Zillow, itemizing and claiming mortgage interest deduction will only be advantageous for 14.4% of homes nationwide, a steep decline from the previous 44% of all homes. This reduces the incentive to buy a home and may hurt housing-demand.
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