[Mike Savino: ] [Ralph Tomaselli: ] emc[Eric Cotton: ] Fairfield, Hartford and New Haven counties are among the housing markets in the U.S. expected to see a drop in housing values in the wake of new federal tax legislation, according to Moody’s analytics.
The new GOP tax law doubles the standard deduction while capping popular deductions that benefit homeowners. Initial bills capped the mortgage interest deduction at $500,000 while the property tax deduction is capped at $10,000, thereby eliminating some incentives for homeownership, according to the National Association of Realtors.
New Jersey, New York and Connecticut are among the states expected to feel the most pain from the tax plan.
“Beginning next year, corporations will still be able to deduct state and local taxes, while individuals and families are capped at $10,000,” said U.S. Rep. John Larson, D-1. “Considering that 41 percent of Connecticut residents itemize and take this deduction, our state will be unfairly penalized.”
Congressional estimates indicate that only 5 to 8 percent of filers will now claim these deductions by itemizing, meaning there will be no tax differential between renting and owning for more than 90 percent of taxpayers, according to the NAR.
Homeowners in high-priced markets in high property tax states would feel the intitial pinch that could potentially ripple into lower priced markets.
When House and Senate bills were first introduced, the deduction for state and local taxes would have been completely eliminated. The House and Senate passed bills would have allowed property taxes to be deducted up to $10,000. The final bill reduces the limit on deductible mortgage debt to $750,000 for new loans taken out after December 2017.
Current loans of up to $1 million are grandfathered and are not subject to the new $750,000 cap. The final bill, while less beneficial than current law, represents a significant improvement over the original proposals, according to NAR.
“We are in favor of tax reform, but one of the things that concerns us, and is particularly onerous to states like Connecticut, is we have high property taxes, and prices are higher, and we have a state income tax,” said Michael Barbaro, president of the Connecticut Realtors Association. “The mortgage interest and property tax deduction got first time home buyers off the fence. They’ll now be able to get a similar benefit by renting.”
The issue does highlight the need for Connecticut to review its own finances and taxation policy, but the new federal rules exacerbate an already fragile fiscal situation and sluggish economic recovery.
Locally, accountants and homebuilders are taking a wait-and-see attitude about the impact of the new law.
Robert Weidenmann, president of Sunwood Development, has built subdivisions in Wallingford and other towns. He said fewer tax incentives might cause a wait-and-see attitude from some clients, but families looking to buy or expand their living quarters won’t be deterred.
“Most people make a decision to buy a home based on need,” Weidenmann said. “Taxes are a relatively small part of the overall process. It’s still sort of a wait and see.”
Home buying helps the overall economy because people spend money on landscaping, renovation materials, and other goods and services to improve their properties, Barbaro said.
“We’re worried about the trickle down effect,” he said.
Robert Gollnick, a certified public accountant, said he has clients with $20,000 in state income tax and $20,000 in property tax deductions who are now capped at $10,000. But some of the increase will be offset by other cuts, depending on circumstances.
“It’s all close,” Gollnick said.
He fears some of the biggest losers are people who have second mortgages and second homes who can’t deduct those costs and wind up paying more.
According to Moody’s, Fairfield County could see a 7.9 percent reduction in home values, Hartford County 7.5 percent, and New Haven Country 6.8 percent, compared to a 3 percent reduction nationally. Essex County in New Jersey would see the highest drop at 10.5 percent.