Tax Reform and Local Real Estate

There’s been tons of chatter about our federal government’s tax reform bill, or H.R.1, which passed at the end of December. Here we are at the end of January, almost one month since the bill went into effect on Jan. 1, and we thought it might be a good time to take a quick look at how we think this bill could affect our local real estate market.

It’s been said by some that this reform could ice our hot residential real estate market, where the average home sells for well above $1 million. And while it might seem likely in other areas, in this area where home prices have consistently been high and many current homewoners hold mortgages above $1 million, tax experts predict that things here will remain relatively the same.  As we have seen time and time again, our Northern California housing bubble seems impenetrable … 

While we now seem to know many of the specifics of the law, only time will tell its implications for housing and homeownership. Here are a few of the changes that we think might be important for you to know: 

2018 Mortgage Interest Deduction: 

Old rules on mortgage interest deduction were that it was limited to interest on $1,000,000 of home acquisition debt on first and second residences. Additional mortgage interest allowed of up to $100,000 of home equity debt. The new rules are that for mortgage debt incurred after Dec. 15, 2017, deduction is limited to $750,000 of qualified mortgage interest. This is for those who are married and filing jointly. Home equity interest is also now nondeductible.
Good news here is that existing mortgages are grandfathered in: Mortgages existing on or before Dec. 15, 2017 are subject to old rules and limits. The bigger change is that existing or new home equity loan interest is no longer deductible. 

Refinancing:

Refinancing does not change the $1,000,000 or $750,000 limits as long as the refinanced debt does not exceed the debt of the previous (original) loan of either and carryover from the original debt to the refinanced debt. This is effective for tax years beginning after 2017 and expiring after 2025.

Capital Gains:

The exclusion of Capital Gains remains unchanged. It is still the case that homeowners must live in their home for at least two out of five years to qualify for the exclusion. 

State and Local Tax Deduction Limited to $10K:

The total combined deduction for real property taxes, personal property taxes, foreign taxes and general sales tax is limited to $10,000. The deduction limit does not apply for any of these things paid in carrying on a trade of business activity of sole proprietorship, partnership and rental activities and farming. This is effective for tax years beginning after 2017 and expiring after 2025.

Standard Deduction:

The standard deduction for both married and single tax payers will nearly double, changing incentives for homeownership for a lot of taxpayers who would itemize their deductions upon purchasing a home. These new tax laws also change the tax brackets for individuals and businesses, which may or may not result in an increase of wealth, either in their wallets or investment portfolios. 

So while we have made some headway in understanding the possibilities of these new tax reform laws, only time will tell how the behaviors of new homeowners or the current market trends might shift. 

Regardless, we will be on the ground floor with our doors open, ready to assist anyone in buying or selling their homes. With all this change, we will also suggest that our clients consult with a tax expert to ensure they are making the best decision for their future.