If you've been following the news at all you probably know by now that the “Tax Cuts and Jobs Act” passed largely along party lines in the House (again) on Wednesday, 224-to-201, following a voting error on Tuesday, and in the Senate 51-48, bringing to a close a two-month debate between Republicans and Democrats in which longtime incentives to homeownership were in the crosshairs and the real estate industry boldly answered a call to arms.
I've been getting a ton of questions from home owners, potential sellers, renters, buyers and just about anyone else as to what this means for them. Let's look at a few of the top line changes and then take a deeper dive into some specific situations.
The reform package caps mortgage interest deductions for primary and secondary residences at $750,000 (down from $1 million today), while capping state and local tax deductions (SALT) at $10,000 (there’s no cap at present), according to the new law.
The provisions mark hard-fought compromises from earlier drafts of the bill that slashed the mortgage interest deduction in half to $500,000, and eliminated state and local deductions entirely.
While many stories have focused on the above changes, potentially as impactful to homeowners were proposed tenure requirements that would have obligated owners to occupy a primary residence for five of the past eight years to qualify for tax exemptions, thereby potentially exposing them to tens of thousands in new capital gains taxes.
Leading up to a final draft of the bill, however, lobbyists successfully fought to save current requirements, by which individual sellers aren’t responsible for taxes on the first $250,000 in profit from a sale — provided it’s a primary residence, occupied for two of the past five years (the capital gains exclusion rises to $500,000 for married couples filing jointly).
This is a big save compared to what could have been a dreadful impact on already low inventory.
FYI, many of the compromises to the original GOP bill stemmed from an ambitious lobbying campaign spearheaded by the National Association of Realtors, a trade organization boasting approximately 1.25 million members (including yours truly) that inundated elected officials with more than 300,000 emails leading up to the vote. Simultaneously, NAR leaders met with legislators in Washington and targeted homeowners across 60 counties to inform them of the bill.
Here's what this potentially means to you.
CHANGES TO MORTGAGE INTEREST DEDUCTIONLet's look at the impact of $250K less in mortgage deductibility.
Assuming you have a 4% interest rate, and many readers have lower than that, and got your loan within the last 5 years or so, most likely you are paying around $7500-$9000 a year in amortized interest which will vary as a function of where you are in the cycle.
Now let's say that you are at a 24% rate under the new plan. The net effect is a few thousand dollars a year depending on your income. So would we all rather have a few extra dollars per month? Sure, but the lower rate may tend to blunt the effect over all.
What might be more painful is......
STATE AND LOCAL (SALT) DEDUCTIONSHere's where the new tax laws might start to become more painful for California home owners. If your home was purchased for more than $800K, you are most likely paying over $10K in property taxes. Any amount over $10K will not be able to be written off. On top of that you will lose the entirety of your CA income tax deduction if you take the property tax deduction. Ouch.
Currently this deduction isn't capped and there will be some big losers such as home owners who bought properties in excess of $2M. Where previously they may have enjoyed a deduction of $25K and higher PLUS their CA state income taxes, now that will be gone most likely costing tens of thousands of dollars.
But there is a silver lining, sort off.....
NO CHANGES TO CAPITAL GAINSThis could have been a killer and really suppressed already low inventory. More than a few potential sellers I know would definitely have put their plans on hold if this aspect of home ownership was changed.
TAKEAWAYSAs I've said repeatedly, the biggest mistake many Buyers and Sellers make is to assume that currently favorable factors will continue indefinitely into the future. Just not true in life or anything Real Estate related.
Will these changes affect certain segments of the market? Yes, but home ownership in Redondo Beach, even with reduced financial benefits, is still an attractive proposition compared to renting.
Higher priced markets may see some drop off which could affect Redondo Beach Real Estate but this remains to be see.
As always the best advice is that if you like your current home, stay there. If you and your family will be happier in different surroundings, call me when it's time to make a move!