Since the passage of the new tax bill for 2018 I have had a handful of clients reach out to me concerned about how the market here in Chicago will be affected by the new tax laws, specifically the tax laws pertaining to home ownership. In the months running up to the new tax bill you may have seen posts on social media or even received e-mails from Realtor friends and the National Association of Realtors (plus local associations) speaking of the detriments of the 2018 tax bill. I thought this would be a good time to have a quick, clear, and honest write up about my personal thoughts on how the tax bill will affect the Chicago real estate market. Please note that I am not an accountant or a tax attorney and you should ALWAYS seek professional advice when it comes to any tax obligation or deduction.
I can only speak to how the tax bill will affect the Chicago market, specifically the downtown, near west, near north, and north side markets. These are the areas I specialize in and the areas where I have the most intimate knowledge of the market and the mindset of the homeowners, buyers, sellers, and renters.
First let us quickly outline the changes in the 2018 tax bill as it pertains to home ownership.
Mortgage Deduction Changes
For NEW home purchases the limit on deducting interest on a mortgage has changed from a mortgage value of $1 million to $750,000. Homeowners with existing mortgages over $750,000 up to $1 million can still deduct their interest up to $1 million. Furthermore, those homeowners can refinance and still deduct interest up to the old $1 million provided that the new mortgage is not greater than the refinance amount. The above holds true for 1st and 2nd homes.
The 2nd home interest deduction is NOT going away. First proposals of the bill had this provision but they were removed. If you are looking to purchase a second home the mortgage deduction may still apply to you provided that the combined amount of the mortgages on your 1st and 2nd home does not exceed $750,000. If you already own two homes with mortgages then you’re grandfathered in up to the old $1 million amount.
Home Equity Loan interest is no longer tax deductible. Previously this was deductible for a home equity loan / line of credit up to $100,000 in value. This is going away for both new AND existing home owners. HOWEVER, the interest of a home equity loan MAY still be tax deductible if the proceeds are used to “substantially” improve the home.
Property Tax Deduction
The new bill limits state and local municipality tax deduction to a maximum of $10,000 per year. This is what concerned most people because it is not just your property taxes, but a combination of your property taxes AND state income taxes that you pay. No one is grandfathered into this tax law change. Previously this deduction was unlimited.
So as it pertains to real estate the above is a list of the most notable changes to the tax code for 2018. So the question on everyone’s mind in the real estate industry is how will the new tax plan affect home values.
The interest deduction changes do not concern me in the least. They grandfather in current homeowners and they still allow for a healthy deduction of up to $750k and they still include second homes. Our current market is fueled by primary home buyers. It is not fueled by investors like it was over a decade ago. We’re not seeing a bunch of condos going up targeting second home buyers that would push then over the $750k limit.
What does give me some pause for concern is the limit on state and local tax deductions of $10k, specifically because this is a TOTAL amount of tax which includes your state income tax as well.
The $10k limit will apply some slight downward pressure on the housing market, there is no denying that. Limiting the amount of tax deduction, even if the overall bill ends up a net positive for your pocketbook, in theory does lessen the “reason” to purchase a home.
Will this downward pressure be enough to change home values in Chicago? No, I do not believe so. Keep in mind I’m discussing the markets I work in. I’m not talking about south suburbs, etc. I am talking about downtown Chicago, the north side, the west loop, etc. It has been my experience that those who own in these areas own because they believe in the neighborhoods and they love the neighborhoods. They have children in school and would not uproot them to save some money. More importantly, I don’t see many of these home owners and would be home buyers in a financial position where they would be drastically hurt by the $10k limit on state / local tax deduction.
With the above being said I do believe there are a couple other factors that we should discuss that could bring the property tax deduction into play. By itself I do not believe it is enough to move the market at all. However, I want to discuss two other items.
We’re seeing a TREMENDOUS amount of building in Chicago of new luxury apartment buildings. In the past year we’ve seen occupancy rates decrease overall in class A luxury apartment buildings. Newer buildings are offering even more concessions and we will see these continue into the spring market as more buildings come on line and even more in 2019. With these concessions in BRAND NEW luxury buildings it is just one more obstacle to get first time home buyers to purchase as long as they don’t need to (having children for example might create a “need”). If they’re single or a couple with no plans for children the rent concessions of these beautiful buildings does provide downward pressure on the housing market. These are typically well to do individuals who pay a large amount of state tax and would be looking at homes, even if a one bedroom that have healthy property tax bills.
At the end of the day, I do not believe we will see any major market shifts across the board because of this. We may see it in certain areas of the market, One Beds priced from 400 to 550k for instance in the downtown market. But for the overall market I do not see much of an effect in Chicago. However, it is something to watch.
Leading up to the passage of this bill and the many versions of it those in the Real Estate industry were posting on social media left and right about how you need to call your congressmen and congresswomen and urge them to vote down this bill. Posts would read “This will lower property values by over 10%” and the like. The National Association of Realtors and the Illinois Association sent me countless e-mails urging me to “take action!”
As much as I appreciate those in our industry looking out for the best interest of our clients and my profession, we sometimes do more harm then good. Think back to the crash. Enough said.
If this fear mongering continues it can be enough to unintentionally scare the market. It was posts like this which lead some of my clients to reach out to me worried. Most of these posts didn’t explain all the changes to the bill. When they did explain the changes they did so in a slanted way. I’m not trying to advocate for this bill, instead I’m just trying to give information and let cooler heads prevail. Frantic social media posting without giving consumers substance does no good and only confuses and panics people. What happens to markets when people are confused and panic?
At the end of the day the only way we will know how the market will adjust will be to watch it. From talking with clients and those in the industry, I do not see the Chicago market decreasing in home values. Our inventory is low. Buyers in recent years have been extremely well qualified and continue to be very well qualified. Those who want to buy are not changing their minds. Sure those on the fence may have some pause, but I don’t believe the tax bill will be enough to push them off the fence. If anything it will be other factors that may do so.
Paul Blackburn is an Illinois licensed Real Estate broker and Realtor with @properties in Chicago. He can be reached at Paul@PKBlackburn.com