Report: How New Tax Plan Will Impact Major U.S. Real Estate Markets
By Maggie Wilson @ Real Estate Daily
December 22, 2017

Now that the House and Senate passed their final version of the new tax bill, Americans are just a signature away from the largest tax reform since 1984. After President Donald Trump signs off on the bill, the housing market will have to weather a number of changes including reduced cap on SALT and MID deductions and rule changes on capital gains exclusion from the sale of a home.

Key Takeaways

  • Luxury market will slow down, especially in areas with high state and local taxes
  • Homeownership incentive is reduced deduction caps and changes to capital gains exclusion
  • Cap on mortgage interest deduction reduced from $1m to $750,000
  • State and local tax deductions will be limited at $10,000; previously unlimited


In the past month, there has been a lot of uncertainty and fear in the real estate industry surrounding the Republicans’ new tax plan. Both the House and Senate version had differing provisions that could have had a huge impact on the housing market. Now, the Republican’s final version of the tax plan – essentially a compromise between the House and Senate version – just passed in both chambers of Congress and is headed to the President’s desk for a final signature.

Luxury real estate markets, especially in high-tax states like New York and California, will take a substantial hit as the new plan unfolds. The main cause for concern comes from the reduced cap on state and local taxes. Prices in Manhattan could drop almost 10% as a result of the changes, according to Moody’s Analytics.

“Taking [SALT] deductions away will be pretty substantial. It adds up quickly. If you own a $3 million property, you could be paying almost $90,000 in state and local taxes,” said Selma Hepp, chief economist at California-based Pacific Union International. “With the $10,000 cap, that’s an $80,000 difference in your deductions.”

In addition, luxury buyers are waiting to gauge the new plan’s impact before buying. “It definitely makes people pause,” said Donna Olshan, president of New York City-based Olshan Realty. “The benefits of homeownership are being slashed.”

Reduced inventive to move will also be a problem moving forward, largely from the changes to mortgage interest deduction and capital gains. While the final plan caps MID at $750,000 instead of the House’s initial proposed $500,000, it will still reduce the incentive to move because existing mortgages are grandfathered into the old $1,000,000 MID cap.

The Republicans’ tax plan also changes rules regarding exclusion of capital gains from the sale of a home. Previously, homeowners could exclude $500,000 in capital gains from the sale if they had lived in the home for the past 2 of 5 years. The new plan would require owners to live in the home for the past 5 of 8 years to qualify for excluding the same $500,000 in capital gains.

The National Association of Realtors is strong advocates against both changes, saying in a statement that lowering MID cap is “a direct threat to homeowners and consumers. Homeowners could lose substantial equity from the more than 10% drop in home values likely to result.”

NAR’s position, however, was based on the House’s $500,000 deduction and not the $750,000 deduction outlined in the plan’s final version. The increased cap of $750,000 is a good sign for upper-middle-class homeowners that would have felt the effects of a lower cap.

Most income groups still stand to lose from the change, but Bay Area household making between $100,000 and $200,000 will feel the most severe impact. Luxury buyers are the only group that won’t feel the full effects of this specific change because a $3 million home has always been beyond the MID cap and they are more likely to pay in cash anyway.