New Tax Law Could Hurt New and Middle-Class Homebuyers

The new Republican-backed tax law passed in December could threaten homeownership in San Francisco and other expensive parts of the Bay Area.  (Erika Aguilar/KQED)

Homeowners and future buyers in the Bay Area, where real estate prices are astronomical, could be hit the hardest by the new Republican tax law that limits how much mortgage interest, as well as local and state taxes, residents can deduct from their federal taxes.

The new tax law signed by President Trump on Friday limits the mortgage interest deduction to $750,000 for new home purchase loans made after Dec. 15. Current mortgage holders are grandfathered in and allowed to continue to take the previous $1 million deduction.

The state and local tax deduction is capped at $10,000, which in California -- where property taxes are less than the national average but state income taxes are high -- could cost wealthy and middle-class taxpayers and homeowners.

About a third of Californians in 2015 used the state and local tax deduction, which had no limit. The average amount claimed was $18,438, according to the Tax Policy Center.

“When you get into the higher incomes, there is a big impact,” said Walter Zhovreboff, administrative director with Bay Area Affordable Homeownership Alliance. “The lower incomes, I don’t think the deduction of interest and taxes is that detrimental.”


That’s because low-income people aren’t buying million-dollar homes. And although the median home price for the Bay Area in November was $910,350, according to the California Association of Realtors, it’s much lower in the inland parts of the state.

In Contra Costa County, only 17.5 percent of home purchase loans this year were over $750,000, according to ATTOM Data Solutions. In Solano County this year, just 26 new home loans were over that amount. But in San Francisco, San Mateo and Marin counties, at least half of the new home loans this year were over $750,000.

Where the new tax law could hurt homeownership in California is in the homebuyers market of young, middle-class Bay Area residents.

When Rebecca Gomez, 38, moved to San Francisco about a year and a half ago from Philadelphia, she and her husband hoped they could become homeowners again. She knew it would take time to buy in the Bay Area’s high-priced real estate market, but Gomez was hoping the tax deductions could help.

“It definitely played into the equation for us,” she said.

Now, with the Republican-backed tax overhaul bill that President Trump signed into law Friday, that savings plan for buying a home in San Francisco will likely be delayed for Gomez.

The mortgage interest deduction will be capped at $750,000 for new home purchases, making it tough in the Bay Area to fully recoup interest paid on home loans because of high home prices.

“The person really has to start thinking about: Do I want homeownership for all the other reasons outside of taxes,” Zhovreboff said.

Gomez said she was already aiming to buy a home under $750,000 because that’s what she could afford, but the new cap on mortgage interest deductions could force her to search for even lower prices.

“It's a pretty big investment to buy a house here,” she said. “I would want to benefit from that investment, so I think we would look for a cheaper house.”

Some local real estate agents say caps on state and local tax deductions, combined with the mortgage interest deduction, could cool the Bay Area’s hot housing market a bit because future homebuyers may look for less expensive houses.