Recent updates from the IRS have recently shaken major markets across the board. The 2018 Federal Tax Reform, which includes new limits on itemized deduction and mortgage interests, is also projected to have significant reverberations in Texas’s real estate sector.

The most substantial changes are in the tax brackets and rates, particularly on property taxes. The IRS retained the seven previous brackets, but their ranges have been modified (see table below).

The provisions specify that all state and local sales, property, and income taxes should not exceed $10,000. Married taxpayers have a limit of $5,000, which is to be filed separately. Tax deductions on home mortgage interest have been reduced from $1 million to $750,000. This applies to mortgages taken before December 15 last year.

Most experts project that the reform’s impact on the Texas housing market will be modest at the very least. While homes in the luxury sector might see considerable effects, the Texas A&M Real Estate Center notes that only about 2.5% of homes sold in Texas go beyond the $750,000 bracket limit. Regardless, the National Association of Realtors predicts that home prices in the state could plummet from 10-15% if mortgage interest and real estate tax deductions are taken away from the computation.

In general, the Texas real estate sector is concerned about the $10,000 cap on property tax deductions. Texas has no state income tax, so local revenue is mostly sourced from property taxes, which is among the highest in the country. In Houston for example, almost a fourth of the homes have property taxes above the given $10,000 threshold. Homeowners who have homes valued at $1 million and above are now required to pay $3,700 more in federal taxes.

While the tax reform poses substantial changes in the Texas market, it is important to note that the effects can be best seen on a state-by-state basis. In New York, particularly New York City, sample computations provided on Yoreevo’s website indicate that a resident with less than $110,000 income will have a maximum deduction of $10,000 on state, local and property taxes. What this means is that people who can afford to purchase a home in New York City will no longer be able to deduct their property taxes. That’s because most of them are high income individuals considering the real estate prices in the city.

On the West Coast, the Biz Journals laid out details of ‘tax credit for contribution’ arrangements made by some Californian lawmakers. They were supposed to be a workaround to the $10,000 limit on federal deduction. However, the IRS countered the attempt, which effectively nullified the proposal. California’s efforts to foil the tax reform is reasonable, as the state has one of the biggest real estate markets, particularly in the Bay Area. Under the new tax tables, the impact of the tax reform would be almost double to those at the upper end of the market.

Some Texas homeowners may feel relieved that the tax cuts are directed mainly at the upper and luxury markets. Still, this could result in significantly lower home values across the entire spectrum, which is not healthy for the industry in the long run.

If you are planning on purchasing a home soon, check out Oyezz’s previous post on the essential steps for buying a home.