Tax Reform. What does that mean for our real estate market in Southern California? As the U.S. Congress works on the Tax Reform Act, we anxiously await the outcome and wonder about the impact it might have. It is assumed there will be significant bearing on Southern California real estate.
Buyers and sellers will be facing difficulties soon if the proposal passes. It would limit the mortgage interest deduction to $500,000 (half of the current allowance), eliminate the ability to deduct home mortgage on a 2nd residence, and would cap the State/local and property tax deduction at $10,000. People will be hesitant to make a move or invest in an additional home. The impact will be recognizable!
A general calculation has the homeowner with a 4% mortgage loan, and in the 28% Federal tax bracket and 9.3% State tax bracket, losing nearly $6,700 (approx. $550 per month) of annual tax savings on interest alone. Over and above the interest deduction loss, the property owner could face elimination of his or her property tax deduction when the ceiling for State/local and property tax deduction is proposed to be $10,000. The loss of those deductions will raise the overall cost of acquiring a home. The affects could discourage existing homeowners from moving, and create an even lower housing inventory while diminishing the buyer pool.
Between the loss of the mortgage interest deduction and a separate measure to eliminate the deduction of State/local income taxes (something that would also disproportionately affect homeowners in Southern California), the most significant impact would be most heavily concentrated on the coasts since they hold the highest real estate values.
If one looks really closely, there might be at least a faint silver lining here and there. For example, per an article in Realtormag.com, “For renters, who don’t take the mortgage deduction, the higher standard deduction will likely make most of them better off. Historical data has shown that renters do not accumulate wealth over the long haul.” Would that allow some renters to put a few dollars away for a home purchase down the road? Only time would tell. Overall, however, the downsides of the tax proposal appear to far outweigh the positives.
It is always wise to consult your tax professional regarding any immediate impact this might have on your personal situation. Our team at Stanfield Real Estate is following this tax proposal very closely, and is working to ensure you are updated about its possible impacts and effects on your real estate portfolio.