Homeowners would lose key tax breaks under Republican tax plan

That desirable beachfront bungalow in Malibu, luxe high-rise condo in New York or historic brownstone in Washington, D.C., might soon come with fewer tax perks.

Americans that borrow large sums of money to live in pricey real estate markets and states with high property taxes like California and New York will reap fewer tax benefits from home ownership under a tax proposal rolled out Thursday by House Republicans. 

Under the proposed plan, the tax code in general would be less friendly for many Americans who own or want to buy real estate. The plan would cap the deduction for property taxes, which is currently unlimited, at $10,000. The proposal would also keep the current mortgage interest deduction of up to $1 million only on existing mortgages, but cap the deduction at $500,000 for new purchases.

"Those in the luxe category will be hit the hardest," says Ralph McLaughlin, chief economist at Trulia, the online real estate site. It will also impact expensive coastal markets like California, Washington state, New York, Massachusetts and cities in Florida like Miami Beach.

"It will be a double whammy for people in those markets," he says, because homeowners there won't be able to reduce their tax bill as much due to smaller allowed deductions for interest paid on big mortgages and high property taxes.

More:Tax Plan: 401(k) plans, vital retirement savings tool, stay the same

More:Tax plan offered by Republicans meets some GOP resistance

More:Republican tax plan targeting mortgage interest deduction deals blow to homebuilders

Expensive cities like San Jose, Calif., where nearly 95% of the homes are valued over $500,000, and San Francisco, with more than 80% of homes priced higher than half a million dollars, according to Zillow, are the ones likely to be affected most. 

If there's a silver lining to the proposed changes, which the realtor community says nullify some of the incentives of owning a home, it is that a swath of Americans won't likely be hit.

As part of the tax overhaul, the government is roughly doubling the standard deduction — or the amount of income taxpayers can shield from taxation. For individual filers it would be $12,000, and for married couples it would be $24,000.

As a result, fewer American homeowners — many living in moderately priced homes in states with low property taxes — will opt to not itemize deductions on their tax returns anyhow, which by itself waters down the effect on most people.

Currently, about 30% of Americans have a large enough mortgage or pay enough in property taxes to take advantage of the housing-related tax shelters on their returns.

What's more, just 11.1% of homes nationwide purchased with a 10% down payment now, according to Trulia data, would result in a mortgage of $500,000 or more, and exceed the Republican's proposed cap on interest deductions.

In short, the changes related to real estate are seen hitting the higher-end of the market most, says Mark Steber, chief tax officer at Jackson Hewitt, a tax-prepartion service. "I don't know many low-income, hard-working middle-class Americans that borrow $500,000."

Still, the homebuilder and realtor community sees the proposed changes as a threat. 

Jerry Howard, CEO of the National Association of Home Builders, says there are now 7 million homes in the U.S., that if sold after a 10% downpayment, would top the $500,000 interest deduction cap. His firm also notes that 3.7 million households paid more than $10,000 in property taxes in 2016.

"The bottom line is we believe this proposal is putting us at risk of another housing recession," Howard told USA TODAY, adding that his group would continue to negotiate for a better deal.

One fear is that existing homeowners — especially in high-priced and high-taxed markets — will opt to stay in their current homes, rather than sell and be subject to less favorable tax treatment.

William Brown, president of the National Association of Realtors, which represents 1.3 million realtors, says the bill "represents a tax increase on middle-class homeowners."

Svenja Gudell, chief economist at Zillow, the online real estate site, says the new rules could actually level the playing field, as the old ones designed to subsidize home ownership ended up favoring the wealthy most.

Whether the proposed tax rules laid out Thursday would become law is tough to handicap, she adds, although she senses "at least a willingness" politically to try pushing through the changes.