Columbia SC Home Values Could Be Affected By Limiting Tax Deductions

Limiting real estate tax deductions could definitely affect Columbia SC home values, and it’s an issue you’re likely to hear more about as Congress and the Obama administration continue negotiations on the comprehensive tax reform that could send the economy over the “fiscal cliff.”

What Could Happen to Columbia SC Home Values?

Any significant reductions in these long-established tax benefits would inevitably trigger declines in Columbia SC home values. Under some circumstances, they could be well into the double digits — 15%, according to Lawrence Yun, chief economist of the National Association of Realtors. “That’s how much we can expect values to fall as buyers discount the value of the deduction in their purchase offers,” according to Yun.

Cutting back on real estate write-offs could make homes less attractive financially, but other potential features of a final tax compromise could counteract the loss of deductions, softening the net impact on values. Plus no one on Capitol Hill is talking at the moment about eliminating the mortgage interest or property tax write-offs, just capping them in some way for higher-income individuals.

But would limiting real estate deductions necessarily lead to lower Columbia SC home values? A 1995 study by the consulting firm Data Resources Inc. estimated that a consumption-based “flat tax” that repealed all deductions would lead to a 15% aggregate decline in home values, costing owners $1.7 trillion in equity holdings.

More recently, a 2010 study for the Tax Policy Center of the Brookings Institution and the Urban Institute sought to model the effects of Obama’s tax reform proposals for fiscal 2011 — limiting mortgage interest and property tax deductions to the 28% bracket level, and the simultaneous increase in the highest-income tax brackets back to the levels existing before 2001.

In one scenario, when taxpayers in the 33% bracket had their mortgage interest deductions limited to 28%, with no other tax changes, housing values dropped 6.9% to 15%, according to the study. The restrictions would have the heaviest effects on houses in areas of the country with relatively high local tax rates and where the costs of renting a home or apartment are favorable when compared with the costs of purchasing.

The reference to “certain assumptions” is key here. Nobody knows what shape tax reform — if it occurs in 2013 — will take: How drastically Columbia SC home values could be pared back, how long a transition period would be provided and what other elements in the final deal might serve to cushion the effect on homes, such as by spurring more vigorous economic growth, lower federal deficits and debt.

But for a segment of the economy such as Columbia SC home values, where asset values are tied in part to long-standing tax subsidies, almost any change that reduces those benefits appears likely to have at least a mildly negative effect on pricing. That is what is now in play on Capitol Hill.

Stay tuned to our site. We’ll keep you up to date on Columbia SC home values, and how they may be affected by any tax reform that Congress may enact.