In The News

Chief Economist Selma featured on SF Biz Times article on GOP tax plan

GOP tax plan could be ‘devastating’ for Bay Area and first-time homebuyers, economist says

Among the changes floated by House Republicans that would hit local homebuyers particularly hard is the proposed $500,000 cap on the mortgage interest deduction for new home loans. Currently the cap is set at $1 million.

The proposed Congressional overhaul of the tax code would be “devastating” to Bay Area residents and particularly to first-time home buyers in the region, according to an analysis from real estate brokerage Pacific Union’s chief economist.

While the House GOP tax plan has been sold as a middle-class tax cut that saves the American family an average of $1,182 a year, Hepp said some of the proposed changes to deductions may make it harder for people entering the housing market in the region.

“We in the Bay Area are a different animal than the rest of the country,” said Pacific Union’s Selma Hepp, referring to the region’s sky-high median home prices.

The elimination of deductions for state and local income taxes would increase many Bay Area residents’ tax bills. Those hardest hit are households with incomes between $100,000 and $200,000, and especially those looking to buy their first home. Among the changes floated by House Republicans that would hit local homebuyers particularly hard is the adjustment to the mortgage interest deduction that would limit the amount where people can deduct their interest at $500,000. Currently the cap is set at $1 million.

Based on a Pacific Union calculation that factors in current home prices and average mortgage terms, 70 percent of home sales are at a potential loss if changes to the mortgage interest deduction limit are passed.

The tax bill would also institute a $10,000 cap on the deduction for state and local taxes, including property taxes. With an estimated 1 percent property tax rate, this cap would affect homes with values above $1 million. Approximately 36 percent of home sales in the Bay Area were over $1 million last year. Plus, most Bay Area homeowners would have a good part of their $10,000 cap eaten by what they pay for California income taxes.

But the tax plan changes don’t only make it more difficult to buy a home — they also lower the incentive for current homeowners to sell, Hepp said.

 

Proposed changes to the capital gains exemption mean that homeowners must have owned and lived in the home for at least five of the last eight years to qualify. Current rules require ownership and residence in two of the last five years and allow the exclusion to be applied once every two years.

Currently, single people pay no capital gains tax on the first $250,000 profit they make when they sell a home. Married couples enjoy a $500,000 exemption.

Under the new proposal, the exclusion would be limited to one sale every five years and married households with incomes over $500,000, or single income households over $250,000, would lose the exclusion completely.

“Say you bought a home in (San Francisco) in 2010, you could have already gained well over in $500,000 in capital gains. So if you don’t want to pay that 40 percent tax rate, you’ll stay put,” Hepp said.

The changes could also limit transactions in the housing market, straining an already undersupplied area and driving prices further up. Furthermore, the ending of deductions on second homes or vacation homes would negatively affect those with vacation or rental properties in places like Lake Tahoe or the Wine Country.

The tax plan is preliminary, with changes likely on the horizon. But Hepp cautioned that lawmakers need to be aware that the tax overhaul could hurt one of the country’s most important regional economies.

“You can’t just make a wide sweeping change and not consider one of the biggest contributors to the economy,” Hepp said.