Republican tax plan would hit Seattle, Eastside homebuyers dealing with pricey market

mortgage-calculator-tennesseeAspiring homeowners in the Seattle region, dealing with the hottest housing
market in the country, would be hit especially hard by the new GOP tax plan
unveiled Thursday.
The proposal would cap the federal mortgage-interest deduction at $500,000
for new-home purchases, down from the limit of $1 million. Basically, new
homeowners would only be able to deduct the interest on the first $500,000
of their mortgage.

This won’t impact most Americans because they don’t own homes that expensive. But it’s a big deal locally, where the median single-family houseselling today is worth $725,000 in Seattle and $855,000 on the Eastside.

Even with a regular down payment, lots of buyers here take out a mortgage
that’s over half-a-million dollars, and they would lose out on some of their
itemized tax benefits if the Republican tax plan passes.

The change wouldn’t apply to current mortgages — only new sales going
forward. And it wouldn’t impact anyone who takes the standard deduction,
which would nearly double under the tax plan, because the mortgage-interest
break is only used by people who itemize their deductions.

But the potential impact — combined with proposed limits on two other tax breaks, for home flippers and mansion owners — looks large. So far this year, 30 percent of all sold homes and refinances in King County used mortgages above $500,000. Looking at single-family houses, 36 percent of
new mortgages this year were above half-a-million dollars. Those rates are
likely to rise in future years as home prices here go up faster than anywhere
in the country.

More than 11,000 King County homebuyers so far this year took out a
mortgage over $500,000, including 4,500 in Seattle, 1,090 in Bellevue, 760
in Kirkland, 660 in Redmond and 560 in Issaquah, according to Attom. Most
of those are single-family houses, but also about 1,200 condos in Seattle,
mostly downtown.

Homes with mortgages over $500,000 made up half of new sales this year in
Sammamish, 35 percent in Bellevue, Redmond and Issaquah, and 29 percent
in Seattle. On the other end, less than 5 percent of new mortgages this year
topped half a million dollars in Tukwila, SeaTac, Kent and Des Moines.
The savings from the tax break can add up. Across the Seattle metro area, the
typical homeowner who used the deduction claimed $11,540 last year.
There are two other possible impacts from the tax plan that would serve to
make housing more unaffordable, said Windermere chief economist Matthew
Gardner.

First, homeowners could be less likely to sell, preferring instead to benefit
from their grandfathered tax credit on their current home. That would starve
a market of homes for sale at a time when inventory is at record lows.
Second, interested buyers might rush to purchase to be eligible for the tax
credit before the plan could pass, increasing demand during what is typically
a slow time of year. “The longer-term effects could be substantial,” he said.

He noted that homebuilders and other special-interest groups have or are
likely to come out against the plan, and called the proposal a “first stab at a
remarkably complex issue.”

The changes would impact people the most in the early years after they buy,
since mortgage payments initially are mostly interest, which is what the tax
break is used for.

Two other elements of the tax overhaul could cost local homeowners as well.
The proposal would also limit capital-gains-tax breaks on home sales.
Currently, homeowners can generally exclude from gross income up to
$500,000 profit on a home sale if they’ve used the house as a principal
residence for two out of the previous five years. The GOP proposal would
change that so the exemption would be applied only if people lived in the
home as their primary residence for five out of the prior eight years. And
they’d be able to use the exemption only once every five years, targeting
speculators and home flippers.

What’s more, the plan would cap property-tax deductions at $10,000. Most
locals wouldn’t be affected. The average homeowner in King County pays
about $5,600 in property taxes; even on expensive Mercer Island, the typical
tax bill is $8,800. But some owners of large homes have bills that top
$10,000; in Medina, the typical homeowner pays $15,200 a year in property
taxes, and on Hunts Point, where the typical home value tops $3 million,
homeowners pay $22,300 in property taxes.

~Mike Rosenberg, Seattle Times

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