Plummeting housing values in much of Contra Costa County are possible if Congress reduces or eliminates the deductions for home-mortgage interest and for property taxes. Many Contra Costa residents, because of higher taxes, may have to move because they can no longer afford to stay in their homes.
Currently, people who, on their federal tax returns, itemize their deductions can lower their tax liability. Mortgage-interest payments and property-tax payments are tax deductible and can offer big savings in taxes. Residents of Danville, Alamo, San Ramon, Orinda, and Lafayette are especially vulnerable to cuts in tax deductions. Homes in these cities can have a value of $1 million to $2 million (or more).
Here is a hypothetical example: Assume the mortgage interest on a 30-year fixed home loan of $800,000 is $50,000 per year. (On a new loan, most of the mortgage payments go for interest, not principal.) The annual property tax on the home could be $15,000.
If the $50,000 and the $15,000 are added together, the total is $65,000.
For someone earning $300,000 a year and itemizing his taxes, the $65,000 can now be deducted from the $300,000, leaving $235,000 in taxable income. However, there is talk that Congress may put a cap of $17,000 on tax deductions, leaving the $300,000 homeowner with a taxable income of $283,000, not $235,000.
The Contra Costa buyer of a house, recognizing the higher tax liability, might not want to pay the seller as much money as the seller wants. Thus, the buyer might demand a lower price for the house.
California now has the nation’s highest annual average for deductions for people who itemize. (The Wall Street Journal, Nov. 19). That average is $33,901. Indiana has the lowest number: $20,111.
Putting even more pressure on housing values is the Health Affordability Act (Obamacare). Beginning in January 2013, Obamacare will put, for an individual earning over $200,000, a 3.8 percent surtax on investment income (interest, dividends, rental income, and capital gains income).
California will add to the pressure. The state, which now has higher personal income taxes because voters approved Proposition 30 on November 6, will put an individual who earns more than $200,000 into a higher tax bracket.
The big question is: Will housing values in Contra Costa plummet if Congress limits tax deductions for individuals itemizing their federal tax returns?