Federal tax reform could impact real estate market, health care costs
December 8, 2017
As congressional leaders in the House and the Senate work to rectify differences in two different bills that would drastically reform the nation's tax code, many are wondering how they might be personally affected by the changes.
With the negotiation process playing out behind closed doors, there are few certainties.
But there are provisions in both the House and Senate versions that some experts and organizations say could be cause for concern in California — especially regarding real estate, local taxes and health care.
As passed, the House bill lowers the cap on the mortgage interest deduction (a provision that allows taxpayers to deduct the interest on a mortgage loan) from $1 million to $500,000 — meaning any additional interest after $500,000 cannot be written off. All current mortgages would be grandfathered in.
“Our phones are ringing
— potential buyers, clients, people are calling and just asking what we know, and at this point all we’re telling people is until we get something finalized we can’t really speculate one way or another …”-Theresa Souers,Public relations chair for the South Tahoe Association of Realtors
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The House version also would limit that deduction to primary residences, thereby eliminating the mortgage interest deduction on second homes.
But while the House bill would alter the mortgage interest deduction, the Senate bill would leave it unchanged. The House and Senate must reconcile the differences, meaning the mortgage deduction changes may or may not make it into a final bill — which is fueling uncertainty for some potential home buyers.
"Our phones are ringing — potential buyers, clients, people are calling and just asking what we know, and at this point all we're telling people is until we get something finalized we can't really speculate one way or another …" Theresa Souers, public relations chair for the South Tahoe Association of Realtors, told the Tribune.
The median home price in South Tahoe is in the $450,000 range, so some homebuyers would not be affected by the proposed changes. However, the same can't be said for more expensive homes.
"Until we know what [Congress] come[s] up with it's hard to say how it's going to impact us, but I can tell you there are concerns because the phones are ringing from these prospective buyers … a lot of people are just holding back to see what happens before they decide to buy a house up here, and that's the biggest impact we're seeing right now," Souers said.
Anecdotally, most of the people calling have been those looking to purchase a second home or purchase property as an investment, Souers said. Based on those calls, Souers said if she were forced to guess, the changes in the House bill could impact the number of sales to investors and second home owners.
"People if they have concerns should call their accountants," Souers said when asked if she had any advice for potential home buyers.
Beyond the mortgage deduction, there are other provisions that could have major impacts on Californians. Among them are changes to the state and local tax (known as SALT) deduction, which allows people to deduct state and local taxes from their federal taxes.
"That's probably the biggest single one because California has pretty high taxes," said Alan Auerbach, professor of economics and of law and director of the Burch Center for Tax Policy & Public Finance at UC Berkeley.
As adopted, both the Senate and House bills are pretty much the same with regard to SALT, according to Auerbach.
"That is a $10,000 cap on property tax deductions and a complete elimination of the deductions for other state taxes … particularly state income taxes. That obviously will affect people in California, especially people with higher incomes who itemize their taxes."
Since passage of the House and Senate bills, some congressional leaders have voiced support for allowing Americans to deduct local income taxes as well as property taxes.
An important note, Auerbach said, for both SALT and the mortgage interest deduction is that both are only applicable if you itemize your deductions.
In general, lower income Americans with few deductions tend not to itemize deductions, opting instead for the standard deduction.
Those people could benefit from the eventual legislation, as both the House and Senate bills would raise the standard deduction, Auerbach said.
One impact that could be felt across the country concerns health care.
The Senate bill would zero-out the penalties for not having health insurance — effectively negating the mandate to have health insurance instituted under the Affordable Care Act, also known as Obamacare.
As Auerbach explained, eliminating the individual mandate is estimated to save revenue because many health care plans purchased through health care exchanges are subsidized by the government.
However, that could have a negative impact on health insurance costs.
"One of the effects that could have would be that people who continue to buy insurance through the exchanges might end up having to pay more because some of the healthier people continue to pull out of the exchanges," Auerbach said.
More uninsured people could negatively impact health care providers, including here in South Lake Tahoe.
"When a patient encounters a large-scale health event and they're not insured, the hospital is likely to accumulate unpaid debt," Dr. Clint Purvance, CEO and president at Barton Health, said in a statement. "If patients cannot pay for their needed treatment, Barton would face carrying that unpaid debt."
Additionally, the tax reform being debated could eliminate nonprofit hospital's ability to take out tax-exempt debt, according to Purvance.
"This would add to the borrowing costs if we were to finance equipment or construction projects in the future."