How Could Tax Policy Changes Affect the Housing Market?

The Link Between Tax Policy and the Housing Market

Tax incentives guide housing demand and affordability across the country. When the government offers tax breaks for homeownership, more people can afford to buy, which typically pushes prices higher. Remove those incentives, and demand often softens, sometimes leading to price corrections.

The mortgage interest deduction is a perfect example of this dynamic in action. For decades, this tax benefit made homeownership more attractive by allowing families to deduct mortgage interest payments from their taxable income. This policy subsidized homeownership, encouraging millions of Americans to buy rather than rent.

Similarly, the SALT (state and local tax) deduction cap implemented in 2017 created immediate impacts in high-tax states like California and New York, where homeowners suddenly faced higher effective tax burdens.

Real estate tax law changes don’t just affect individual homeowners. Investors closely watch tax policy shifts because they directly impact investment returns. When depreciation rules become more generous or 1031 exchanges offer better deferral opportunities, investment capital flows into real estate markets. This increased investor activity can drive up property values and reduce inventory for regular home buyers, creating competitive pressure in rental markets as well.

Key Tax Provisions That Affect Real Estate

Major tax provisions shape how Americans interact with real estate markets, each creating different incentives and behaviors that collectively influence property values and the market as a whole. These include:

Mortgage Interest Deduction

The mortgage interest deduction is one of the most significant tax benefits for homeowners. Currently, homeowners can deduct interest paid on mortgage debt up to $750,000 for homes purchased after December 15, 2017, while those with existing mortgages under the old rules can still deduct interest on debt up to $1 million.

This deduction reduces the real cost of borrowing for home purchases, making homeownership more affordable for millions of families. The benefit provides greater value to higher-income taxpayers in higher tax brackets, which sometimes creates criticism about whether it primarily helps those who need assistance the least.

However, for many middle-class families, this deduction can mean the difference between affording a home purchase or remaining renters.

Property Tax Deductions

Property tax deductibility through the SALT deduction has become a contentious political and economic issue since the 2017 Tax Cuts and Jobs Act capped these deductions at $10,000 annually. This change disproportionately affected homeowners in high-tax states where property taxes often exceed this limit significantly.

The SALT cap effectively increased the real cost of homeownership in some areas, contributing to some population migration toward lower-tax states and putting downward pressure on home values in affected regions.

Capital Gains Exclusions on Home Sales

The capital gains exclusion allows homeowners to exclude up to $250,000 in gains for single filers or $500,000 for married couples when selling their primary residence, provided they’ve lived in the home for at least two of the previous five years.

Many homeowners strategically time their sales to maximize this benefit, sometimes holding properties longer than they otherwise would to qualify for the exclusion. The exclusion also encourages homeownership over renting since it provides a substantial tax advantage for building equity in a primary residence rather than paying rent with after-tax dollars.

Depreciation and Tax Deferral (1031 Exchanges)

Investment property owners benefit from depreciation deductions that allow them to reduce taxable income while building equity, plus the ability to defer capital gains taxes through like-kind exchanges. These provisions make real estate investment more attractive compared to other asset classes.

Bonus depreciation rules have provided even greater benefits in recent years, allowing investors to accelerate deductions and improve cash flow from real estate investments. Combined with 1031 exchange opportunities, these tax advantages help explain why institutional and individual investors continue allocating significant capital to real estate markets.

How Tax Policy Changes Could Influence Market Behavior

Tax policy modifications create ripple effects that touch every segment of the housing market, from first-time home buyers stretching to afford their initial purchase to sophisticated investors managing large portfolios.

• Home buyers: Changes in deductions and credits directly impact what families can afford to spend on housing. If mortgage interest deductions become less generous or property tax deductions shrink further, the effective cost of homeownership rises, potentially pricing out some buyers or forcing them to consider less expensive properties or different locations.
• Sellers: Property owners often adjust their timing based on tax considerations, creating temporary supply fluctuations that affect market dynamics. When capital gains rules become less favorable, many accelerate sales to lock in current tax treatment, while announcements of more generous future rules can cause sellers to delay transactions.
• Investors: Real estate investment strategies, rental pricing, and portfolio choices all shift based on tax policy changes. Modifications to depreciation schedules, capital gains rates, or exchange rules can dramatically alter investment returns, with favorable changes increasing competition for properties and less favorable treatment potentially creating opportunities for regular home buyers.

You’ll also see market segment shifts. For example, luxury markets often show more sensitivity to tax changes since high-income buyers face higher marginal tax rates and benefit more from deductions. Meanwhile, affordable housing markets may experience increased demand if tax policy changes push some buyers toward less expensive properties, creating ripple effects throughout different price ranges.

How Trump’s Tax Policy Could Impact Housing

The current administration’s tax policy approach builds on previous reforms while proposing additional changes that could significantly affect real estate markets.

Trump’s tax policy proposals include extending and potentially expanding provisions from the 2017 Tax Cuts and Jobs Act that are scheduled to expire. This includes maintaining current mortgage interest deduction limits and potentially addressing the SALT deduction cap that has affected high-tax state residents. The housing market under Trump reflects these policy considerations alongside broader economic factors.

Tax policy and the housing market become especially complex when considering potential changes to capital gains taxation and investment incentives. Proposals to maintain or reduce capital gains rates could encourage more real estate transactions, while enhanced depreciation benefits might attract additional investment capital to property markets.

The tax policy and real estate relationship also extends to broader economic policies that influence mortgage rates and lending conditions. Tax policies that stimulate economic growth often correlate with rising interest rates, creating mixed effects on housing affordability and demand patterns.

Regional variations in tax policy impacts remain significant, particularly regarding state and local tax treatment. Areas with high property taxes continue feeling pressure from SALT deduction limitations, while states with lower tax burdens may see continued growth that supports local real estate demand.

What Home Buyers and Sellers Should Know

Understanding how tax changes might affect your real estate decisions can help you time purchases, sales, and refinancing more strategically.

• Consult tax professionals: Work with tax advisors who understand current law and proposed changes to model different scenarios and optimize your timing for maximum benefits.
• Consider mortgage implications: Tax changes can affect your overall affordability and monthly payment calculations, so factor these into your financing decisions, especially when considering when to refinance.
• Focus on the fundamentals first: While tax benefits are valuable, they shouldn’t override important considerations like location, property condition, and your personal financial circumstances.
• Time transactions strategically: If tax law changes are coming, consider whether accelerating or delaying your purchase or sale could provide better tax treatment.
• Stay informed about regional impacts: Tax policy changes often affect different markets differently, particularly in high-tax versus low-tax states.

As a mortgage lender, Griffin Funding understands how tax policy changes affect financing decisions and can help you navigate these interactions. Our team stays current on regulatory changes and can explain how different scenarios might impact your specific situation.

Consider using the Griffin Gold app to track market conditions and stay informed about policy changes that could affect your real estate decisions.

Final Notes

Tax policy and housing are interconnected in ways that create both opportunities and challenges for property owners, buyers, and investors. Staying informed about real estate tax law developments helps you make better decisions whether you’re entering the market, optimizing your current holdings, or planning future transactions.

Griffin Funding provides the expertise you need when getting a mortgage. Our team combines deep knowledge of mortgage markets with an understanding of tax policy implications to help you achieve your homeownership goals.

Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 23 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up with important changes in the industry to deliver the most value to Griffin's clients. Under Lyons' leadership, Griffin Funding has made the Inc. 5000 fastest-growing companies list five times in its 11 years in business.