Tax Reform Impact on the Bay Area

Oct 3, 2017 | Blog

illustration of house for saleThe largest group of real estate agents in California has cautioned that a tax reform proposal made by Republicans would diminish the appeal of purchasing a home in the Golden State. However, it has since been pointed out by economists that the effects of such a proposal could also result in a decrease in skyrocketing home prices.

Geoff McIntosh, President of California Realtors Association has suggested the Republican proposal to eliminate local and state tax deductions, including property taxes, could have a negative effect on the housing market in California and on the state itself.

Under the new proposal, the average home buyer in California could end up paying $3,000 in additional taxes each year. Only those home buyers who opt to list deductions would be impacted if the reform plan takes away their capability to subtract property taxes on the federal returns of these individuals. Some economists have stated that even if the proposed tax reforms are permitted and this makes home buying less appealing in the end, it could mean possible benefits for buyers as well.

Fred Foldvary, an economics lecturer at San Jose State University, has stated that there are a number of variables involved; however, home prices would be reduced. He goes on to say that home prices are currently propped up by subsidies that are implicit. They include property taxes, deductions for interest on mortgage and other tax benefits. The value of residential real estate is puffed up by all of these subsidies.

Our San Jose tax attorneys have researched this topic extensively, and have found that the experts say that this all comes down to the simple rules by which economics are governed. Annette Nellen, an accounting and taxation professor at San Jose State University has summed it up as being simply a case of ‘supply and demand.’ She goes on to say that if the housing demand drops, home prices could also drop.

An economist and founding partner at Beacon Economics, Christopher Thornberg, is in agreement that the prices of homes could drop. However, he questions how apparent the decline could actually be, especially considering the dramatic rise of home prices in the state of California. This is particularly true in the Bay Area where housing prices are extremely high.

Thornberg estimates that there would be a 0.5 percent reduction in home prices caused by the property tax deduction loss. He says this has to be placed in the normal context of a market in which home prices rapidly increase.

The prices for buying a home in the Bay Area have been rising, based on the region in which these homes are located. It ranges between 7 percent per annum and 15 percent per annum. This is an indication that any effect of the tax reform that could reduce home prices might be hard to notice.

Geoff McIntosh believes the proposed Republican tax reform will remove the incentive for individuals to purchase homes, diminish the middle class and increase taxes on a large number of homeowners in California. He further states that any change that makes buying a home less appealing will be harmful to the real estate industry and the economy of the nation.

However, Republican legislative leaders believe the tax cuts and reforms would spur the economy of the nation, slash corporate taxes, assist in job creation and ease the process for businesses to take on investments.

In his show of support for the tax-reform package, President Trump has tweeted that this should be seen as the right tax cut happening at the right time. He goes on to say everyone needs to succeed together as one people, one team and one American family.

Our tax attorneys will continue to monitor the situation. Check back with us soon for more updates on this developing story.

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