People searching for homes outside their current metros are looking to save money by lowering their taxes.
Home searchers in the ten metros with the highest income, property and sales tax rates who are searching outside of their metros are focusing their searches in areas with tax rates three-times lower than the metros they are seeking to leave. This is according to a Redfin analysis of home searches on Redfin during the second quarter (Q2) of 2018.
24% of Redfin home searchers are searching outside of their current metro as of Q2 2018. Taking a closer look at where these outward searches are occurring, most searchers currently reside in high-cost (including high-tax) metros, and are looking at low-cost metros.
In California, home searchers in all but one major metro concentrate their out-of-state search on Seattle, Washington. Los Angeles is the odd one out, as out-of-state searches here are focused on Phoenix, Arizona, followed by Las Vegas, Nevada and only then on Seattle.
While Seattle is also a relatively expensive city, where housing and other costs of living are high, income taxes in the state of Washington are non-existent. The allure of no income taxes is especially attractive for California residents, who currently pay the highest income tax rates in the nation. Of course, Washington residents pay significantly higher sales and property tax rates, but that’s not as readily apparent until one actually moves there.
The tax bill’s impact
The 2018 tax bill changed the calculus on buying a home slightly, including:
- reducing the ceiling for the mortgage interest deduction (MID) from $1 million to $750,000;
- increasing the standard deduction, making it less likely for individuals to itemize and use the MID; and
- limiting state and local income (SALT) taxes to $10,000, which had a particular impact in California, where SALT taxes are often well above the new ceiling.
Redfin asked recent homebuyers how 2018 tax reform has impacted their home purchase behaviors. The survey found:
- 8% of homebuyers moved their search out-of-state due to the tax changes;
- 9% of homebuyers moved their home search to another city with lower taxes;
- 10% purchased a less expensive home due to tax changes; and
- 10% purchased a more expensive home due to tax changes.
Thus, taxes clearly are a significant part of the homebuying decision — for some. The majority of potential homebuyers will buy regardless of tax issues, though their home purchase may look a bit different than it otherwise would have.
Further, the home searches Redfin reports are just that — searches, not concrete moves. While taxes may factor into the equation, the biggest reason for people who actually move is due to a job change, followed by family and retirement, according to a United Van Lines study.
The good news for California is that jobs are plentiful, and growing, across the state. California’s healthy economy benefits the real estate market, improving homebuyer confidence and steady access to incomes.
And for those worried about how the tax bill impacts their homeownership aspirations, California has several pieces of legislation in the works that aim to reduce the tax burden amplified for many residents by the 2018 tax changes. Stay tuned for updates as the legislative season comes to a close in November.