The tax plan unveiled today in Washington proposes new limits on a pair of deductions popular with homeowners, the deductions for mortgage interest and for state and local property taxes. How would the deduction reductions impact Chicago-area homeowners?
Not enough to worry that the sky is falling.
One proposed change tied to homeownership would cut in half the mortgage size for which homeowners can deduct interest payments on their federal taxes. The limit, now $1 million, would drop to $500,000. The space between those numbers includes a large share of Chicago-area homeowners. The limit would apply only to new purchase and refinance mortgages. Current mortgages above the $500,000 limit would be grandfathered in; those homeowners would keep the deduction.
The other change puts a cap of $10,000 on the amount of state and local taxes citizens deduct from their taxable income. For most homeowners in Illinois, property taxes are a big piece of the state and local taxes they pay.
Both proposed reductions "add to the cost of homeownership, which creates one more impediment to buying a house," said Mike Golden, co-founder of @properties, the Chicago area's second-largest real estate brokerage. "It's no different than taxes going up, which we're already dealing with in Illinois."
On the North Side of Chicago and in north and west suburbs, where $500,000 to $1 million is a relatively common price range for a house, "taking away that deduction will have some effect on pricing" over the long term, Golden said, as buyers twist the knobs on their household finances to maximize what they can get in a home. Prices could come down a bit as that federally underwritten price support fades from view.
But an executive in new-home sales pointed out that the reductions can't be viewed in isolation. "If you also look at how the tax brackets will change, it's going to mean a pretty substantial net tax decrease for the types of individuals who can afford homes in that $500,000-to-$1 million price range," said Oren Jacobson, lead market analyst at New Home Star, a Chicago-based firm that sells new homes for builders nationwide.
"My assumption is that for most, the gain will outweigh the loss, even if you assume that someone at that price level changes buying patterns based on tax deductions," Jacobson said. "Which is debatable."
Year-to-date in 2017, about 6.5 percent of purchase or refinance mortgages taken out in the six-county Chicago metro area were for $500,000 or more, according to Attom Data Solutions, a property information service. The percentage is higher in individual counties that have a high proportion of upper-end homes. In Cook County, 7.6 percent of mortgages this year have been for half a million dollars or more, according to Attom, and in Lake County, 7.3 percent. Statewide, 4.9 percent of mortgages were over half a million, giving Illinois the 16th-highest proportion among the 50 states and Washington D.C. (In the nation's capitol this year, more than one-third of mortgages are for $500,000 or more.
The impact of the other proposed change, a cap on deductions for state and local taxes, or SALT, may also have been blunted by the proposal as it stands.
While earlier reports said the deduction might be eliminated entirely, today's proposal instead caps the deduction at $10,000. In August, Brian Bernardoni, senior director of government affairs and public policy for the Chicago Association of Realtors, said that in 2014, the average Illinois taxpayer who claimed a SALT deduction subtracted $6,500.
That suggests that the $10,000 cap is high enough to keep the deduction available to most of the Illinoisans who have been using it when filing their federal taxes.
Bernardoni said Wednesday that "a $10,000 limit is not high enough for high-tax areas" such as suburban Cook and the collar counties.
The National Association of Realtors, which is meeting in Chicago this week, will issue a full statement on the changes by late Friday, Bernardoni said. The group's preliminary take on the changes, issued in a statement by its president, William Brown, a California real estate broker, is that "it appears to confirm many of our biggest concerns."
In this initial form, the plans do not seem to have a disproportionate impact on Chicago.
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