Sep 235 min read

#2 Politics in Real Estate: How Changes in Tax Policies Affect Home Prices, Employment, and Business Growth #2 in the series

Updated: Sep 25

This is #2 in a series of 20 posts coming up regarding Politics and the effect on home ownership. Follow our posts here to see the upcoming news. Tax policies have a substantial impact on home affordability, employment, and the broader economy. These policies, especially related to mortgage interest deductions, property taxes, and capital gains taxes, shape the financial landscape for homeowners and prospective buyers. Additionally, local state and county property taxes can create significant financial burdens, particularly in states like New York, where even owning a home outright doesn’t always reduce costs. Here’s a detailed look at how different tax policies, proposed by both major parties, affect the housing market.

1. Mortgage Interest Deductions

The mortgage interest deduction allows homeowners to deduct the interest paid on their mortgage from taxable income, making homeownership more affordable. Changes to this policy can significantly affect affordability, especially in high-cost housing markets.

How It Works: Homeowners can deduct the interest paid on mortgages up to a certain amount. In 2017, the Tax Cuts and Jobs Act (TCJA) lowered the deduction cap from $1 million to $750,000. For example, if you have a $500,000 mortgage at 4%, you’d pay about $20,000 in interest the first year, which you could deduct from your taxable income.

Year	Party Proposal	Mortgage Interest Deduction Cap	Impact on Home Affordability
2016	Democratic-leaning	$1,000,000	Higher deduction, more affordable
2017	Republican-led TCJA	$750,000	Lower deduction, less affordable
2024*	TBD	TBD	Potential future changes

Republican Party: Republicans tend to support limiting deductions as part of broader tax reform efforts to simplify the tax code. They lowered the mortgage interest deduction cap in 2017.
Democratic Party: Democrats typically favor expanding deductions to promote homeownership. Some have proposed raising the cap back to $1 million in high-cost areas.

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2. Property Taxes and SALT Deductions

State and county property taxes vary widely. In states like New York, high property taxes can make owning a home prohibitively expensive, even when homeowners have paid off their mortgage. The State and Local Tax (SALT) deduction, which allows taxpayers to deduct up to $10,000 of combined property and income taxes, further complicates this picture.

New York Example: Homeowners in upstate New York may own their homes outright but still face property tax bills of $10,000 to $14,000 annually for a home valued at $400,000, making even mortgage-free living expensive.

State	Party in Power	Average Property Tax Rate	Annual Taxes on $400,000 Home
New York	Democratic	2.5% – 3.5%	$10,000 – $14,000
Florida	Republican	0.83%	$3,320
Texas	Republican	1.81%	$7,240
Tennessee	Republican	0.64%	$2,560

Why Homeowners Are Moving to Lower-Tax States

The SALT deduction cap of $10,000 is especially burdensome for homeowners in high-tax states like New York. This, combined with high property tax rates, has led many to move to lower-tax states like Florida, Texas, and Tennessee, where property taxes are much lower, and the cost of living is more affordable.

State	Party in Power	Tax Burden	Reasons for Moving
New York	Democratic	High property taxes, SALT cap	Homeowners moving to lower-tax states
Florida	Republican	No state income tax, low property taxes	Popular for retirees and snowbirds
Texas	Republican	No state income tax, moderate property taxes	Attracting families and businesses
Tennessee	Republican	No state income tax, low property taxes	Popular for relocations from high-tax states

3. Capital Gains Tax and Home Sales

Capital gains tax applies to profits made from selling a home. Homeowners can exclude up to $250,000 ($500,000 for married couples) of the gain from their taxable income, but any profit above that is subject to capital gains tax. Proposals from both parties may affect home sales.

Year	Party Proposal	Capital Gains Tax Rate	Impact on Home Sales
2016	Republican-leaning	15% / 20% (depending on income)	Encourages sales
2021	Democratic proposals	Proposals to raise to 28%	May reduce sales and inventory
2024*	TBD	TBD	TBD

Republican Party: Republicans generally favor lower capital gains taxes to encourage home sales and market liquidity.
Democratic Party: Democrats have proposed raising capital gains taxes for high-income individuals, which may discourage home sales in certain markets, reducing supply and increasing prices.

4. Business Tax Policies and Employment

Corporate tax policies affect businesses' ability to hire, which impacts home affordability through wage levels. Tax changes that increase business costs may reduce the number of jobs available, leading to lower overall affordability for housing.

Party	Proposed Corporate Tax Rate	Impact on Employment and Home Affordability
Republican Party	21% (make TCJA tax cuts permanent)	Could boost hiring, increase wages, improve affordability
Democratic Party	28% (for large corporations)	Small businesses may struggle, fewer jobs, reduced affordability in some areas

Looking Forward

As we head into the 2024 election, tax policies concerning mortgage interest deductions, property taxes, capital gains taxes, and corporate taxes will shape the housing market, employment levels, and home affordability. Understanding these policies is critical for homeowners, prospective buyers, and small businesses alike.

Key Takeaways:

Republicans generally favor lower corporate and capital gains taxes, limited mortgage interest deductions, and lower tax burdens on businesses to boost employment and home affordability.
Democrats seek higher corporate taxes on companies, expanded deductions, and higher taxes on high-income earners to address what they term to be wealth inequality.

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