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Bay Area homeowners hit hardest in new federal tax law

Bay Area residents already face some of the highest housing prices in the country.

And this year, some of the tax benefits of owning that valuable real estate will evaporate.

The new federal tax code is expected to strip the typical San Jose homeowner of $5,400 in deductions this year, the highest of any metro area in the country, according to a new report by Apartment List. The typical East Bay homeowner will lose $4,500 worth of deductions, roughly $110,000 over the course of a 30-year mortgage. Average homeowners in Santa Cruz and Watsonville are expected to lose about $4,300 in deductions.

Economists expect the tax changes to drive up overall home ownership costs in California and decrease the inventory of homes for sale.

“We think it’s going to undermine values,” said Jordan Levine, senior economist with the California Association of Realtors. “It just makes all of our existing problems that much more serious.”

The new tax law caps deductions for state and local taxes at $10,000 and reduces mortgage interest deductions on new loans from $1 million to $750,000, pinching residents in states like California with higher local taxes and housing costs. The new code also doubles the standard deduction, meaning fewer homeowners will itemize on their taxes.

Levine expects the impact to be similar to raising mortgage interest rates about three quarters of a percent. The association also expects the tax plan to encourage Bay Area buyers to stay put rather than sell, buy another, pricier house and potentially lose thousands of dollars of mortgage interest deductions.

The median sale price for a home in the nine county region in January was $712,000, an increase of nearly 12 percent from the previous year, according to real estate data company CoreLogic. The typical home sold for $1.1 million in Santa Clara County, $755,000 in Alameda County, and $1.3 million in San Mateo County.

Chris Salviati, economist at Apartment List and author of the study, said the new law may have already affected the prices for some purchases. Other impacts, such as a decreased inventory of homes for sale, may take longer to show up.

The loss of deductions could discourage some residents from buying, and make renting look more attractive, he said. It could also encourage more residents to leave the region for other growing, more affordable technology hubs like Seattle and Austin, Texas, Salviati said.

Economists for the real estate industry think the impact could be substantial. The California Association of Realtors expects the law will cause home prices to drop 4 percent and home sales to dip 3 percent across the state.

The new tax law is expected to cut itemized deductions for Bay Area homeowners deeply. For example, the typical homeowner in the 18th Congressional district, encompassing a stretch from Redwood City to San Jose and including some of the wealthiest communities in the country, deducted about $60,000 in state and local taxes in 2015, according to a study by the National Association of Realtors. Those deductions are now capped at $10,000 under the new law.

The typical mortgage interest deduction for a homeowner in the district was $17,000, which is expected to be reduced by about 25 percent.

The priciest communities are hit the hardest — owners of the best homes in Saratoga, Palo Alto or Piedmont can expect to lose $17,200 in deductions annually. Nationwide, the most populous and politically liberal states on the coasts are hit hardest by the new plan, with California fairing worst.

The smaller deductions for mortgage interest and local taxes may be offset by an increase in the standard deduction and other tax cuts. San Jose State tax policy professor Annette Nellen said tax bills will be affected by family size, income and many other personal factors.

“You just have to do the calculations,” Nellen said. “So many factors come into play.”

Bay Area real estate agents do not expect the law to reverse nearly six years of rising prices. The region still continues to create jobs without building sufficient housing for the new workers, creating a dramatic imbalance between supply and demand.

Bill Moody, an agent with Referral Realty in Cupertino, said some clients ask about the new tax law, but it’s not a crucial factor in purchases. Buyers looking in the best school districts and neighborhoods are still snatching up multi-million dollar properties with cash offers.

Moody doesn’t expect the tax changes to slow down the high-end buyers. “I don’t think that’s a concern for them.”

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