A cap on state and local tax deductions and the mortgage interest deduction (MID) would cause one-third of U.S. homebuyers to try to buy in other states. This percentage is even higher in California, where residents rely heavily on such deductions to make up for the high income taxes and cost of living, according to a survey by Redfin.

In recent weeks, the House of Representatives and the Senate both passed similar versions of a tax overhaul bill, with some key differences. Members of the Senate and the House are meeting in Conference Committee to hash out these differences and form a final bill.

In the initial bills, both the House and Senate included the elimination of state and local income taxes. The House included a provision to limit the amount of mortgage qualifying for the MID from $1.1 million to $500,000.

While nothing has been signed yet, at the time of publication it appears the MID is mostly safe from tax reform. The final version appears to limit the amount of mortgage eligible for the MID to $750,000. It also limits the deductibility of home equity loans (HELOCs) to $100,000.

The state and local income tax deduction — and the property tax deduction — is also further limited. Under the joint version of the bill, these deductions will be capped at $10,000.

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Redfin surveyed 900 homebuyers active on Redfin’s home search engine across the nation in November — not a huge sample, but indicative of a trend.

Nationwide, 11% of potential homebuyers said they will seriously consider moving out-of-state if these tax changes pass. 15% said they will consider moving.

In California, a larger 17% said they will seriously consider leaving the state if these tax changes pass. 14% said they will seriously consider moving.

For both California and national respondents, 6% said they will absolutely move to another state if these tax changes occur.

California’s high taxes

Californians pay some of the highest taxes in the nation. The state’s top tax rate is the highest in the nation. Further, California’s higher income levels — canceled out by the high cost of living here — increase the actual amounts paid in taxes.

Currently, roughly 15 million Californians deduct state, local and property tax deductions and 7 million taxpayers claim the MID, according to the California Department of Finance.

The limited ability to deduct these payments will translate to residents paying much more in taxes than they are used to paying. On the other hand, this legislation works to the advantage of states like Texas and Florida, where income and property taxes are low or non-existent.

But will residents actually leave California for low-tax states?

Probably not. The cost of moving alone negates any immediate tax savings to be had. But the higher tax burden for Californians does mean less money in California pockets.

For real estate, this translates to less money free to be spent on housing. The state already has the highest rents relative to income in the nation — renters regularly spend half or more of their paycheck on housing costs. Would-be homebuyers are unable to buy due to the exorbitant cost of homes (read: cost of land) here in California. Combined, this makes for one of the lowest homeownership rates in the nation.

Expect homeownership to continue at its sub-55% rate for years to come. This tax plan does nothing to encourage responsible homeownership or assist qualified renters in saving for a down payment. In fact, as homebuyers find themselves with less cash on hand following tax day, they may be unable to keep up with the steep home price increases that have occurred across the state since 2012.

That’s the bad news. The good news for real estate agents and brokers is that demand for homes runs so deep (due mostly to the lack of new construction relative to homebuyers) that it’s unlikely home prices will be much affected by the tax changes. Home prices will be impacted by rising mortgage interest rates in 2018. This price slippage will be shallow and brief, as homebuyers clamor over California’s small inventory of home listings.

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