In November, a cute house went for sale down the street. A 3-bedroom, 1-1/2 bath farmhouse in a college town and within walking distance to everything.

The listing was asking $595,000.

Aside from the observation that the houses in this neck of the woods are expensive, what can we say about this listing?

Well, in November the seller expected to receive $595,000. In January, that expectation is almost certainly lower. How much? 

It could see a reduction in value of over $50,000.

SALT in the wounds

Congress decided to limit the deductibility of local property tax, as part of the limitations generally of state and local taxes, or SALT. The public policy reason for this is not clear.  Other changes to deductibility, such as the reduction of home mortgage deductibility (from $1 million of mortgage debt to $750 thousand) are arguably to reduce the rise of private debt levels. (Even though debt service payments as a percent of personal disposable income are lower than any time in 35 years.)

But why change the deductibility of property tax, of all things? In the short term, it is not likely to change public behavior. Although, as this provision affects the liberal-leaning states more than others, the long term effects could be surprising.

The fact is, this is a provision that just might hurt some innocent taxpayers.

Loss Example

Getting back to our farmhouse, how could I have possibly concluded that the value could be hit by $50k?

An additional piece of information: the property taxes are $17,000 per year. Before the bill, any prospective owner would have expected to pay the taxes and reduce her taxable income by that amount. That's the deduction.

After the bill, the prospective owner now calculates that she pays $17,000 in property taxes and deducts $10,000. That leaves $7,000 not deductible, so the prospective homeowner's tax bill would go up by whatever her tax rate was, times $7,000.

If her tax rate was 30%--a reasonable assumption--her new tax bill would increase by $2,100.

It's that increase in the tax bill that drives the change in house value. If she suddenly can't pay $2,100 in, say, mortgage interest, that's the amount of house she won't be buying.

At 4 percent mortgage interest--a reasonable rate--she will be strongly considering reducing her offer by $52,500 in order to exactly preserve her financial condition.

Here is the Calculator

Follow this format in a spreadsheet, using your assumptions for home value, mortgage interest and tax rate. Then be prepared to take a deep breath. Because the percentage loss at the bottom of the calculator can be a big hit.

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