by SCOTT VOAK | Special Advertisement

How the New Standard Deduction Is Hurting Entry Real Estate

I’m writing this in early December when November sales data has been calculated, but not released to the public. When released, the numbers will show that the average price for an attached home has fallen in the last two months and is now only 1% above last year (the median price for an attached home is actually below last year’s price). Detached pricing is holding up better with the average still 9% above last year, though the median is only 1% higher.

All of these numbers point to a stronger market at the higher end than at the entry level. There is a simple explanation for this.

The new tax law increased the standard deduction for a married couple to $24,000, with the maximum deduction for state and property taxes set at $10,000. This means that you need $14,000 of additional deductions before it pays to itemize your taxes. Assuming your medical expenses are less than 10% of your gross income, this would come from your mortgage interest. At today’s interest rates on a 30-year fixed mortgage, to incur $14,000 of interest expense on the first year of your mortgage, the loan would be approximately $313,000 or a purchase price of roughly $375,000 with 20% down.

On a typical $500,000 purchase, the first year’s interest would be about $18,000, creating only $4,000 of additional deductions, which at a 22% tax rate would be a tax benefit of $880, and that is only if payments were made the entire year. Given that the overall payment with taxes insurance and HOA is probably close to $2,750 and a $500,000 home will typically rent for around $2,500, the new tax law has taken much of the tax incentive away for potential first-time homebuyers.

On the flip side, this is an opportunity for investors, especially in areas where most of the homes are under $500,000 (obviously outside San Diego). With the incentives reduced for home ownership, a larger portion of the population will chose to rent for longer, solidifying returns for investors.


re_voakauthorseal Scott Voak, MBA – Broker

Managing Partner
CalDRE #: 01153157
16710 Bernardo Center Dr.
(888) 311-6311