The New Tax Law and Its Housing Impact

There have been a few changes in real estate taxation that will take effect in 2018, so for this blog post, I will talk about how it affects homeowners living in the Bay Area, what has changed, and what stays the same. Before we begin, I’d just like to clarify that I am not a CPA, and that you should talk to your own tax advisor about how the new tax reform affects you personally, but I thought this would be a nice topic to discuss.

First the good news: Ever wonder why some of your friends move around every couple of years, upgrade or rent after selling their house in a high market, then buy again after the market takes a dip? Well, chances are it’s because they are taking advantage of the primary residence capital gains exemption. This exemption allows homeowners to keep any profits earned from selling their primary residence up to $250,000 for individuals, and $500,000 for married couples. This law fortunately didn't change…, so for those of you who want to make a move and cash out on this hot market, you can still do so as long as you have lived in your property for at least 2 out of the last 5 years. 

Not so good news: State tax plus property tax exemption is now limited to $10,000. This one pretty much screwed homeowners over in the Bay Area. I usually tell people that the average property tax rate is 1.2%. Based on data from the San Mateo County Association of Realtors, the median sales price of a single family home is $1,500,000, with condos at $875,000 (see graphic 1). Property taxes on an average property purchased for $1,500,000 is at $18,000, and $8,000 of that amount is not claimable under the new tax law.

If you own property and make at least $150,000 as a single person, or $180,000 as a married couple, then you won't be able to deduct any of the property taxes you pay under this new rule. The state income tax for $150,000 is already more than $10,000, which would mean that your income would eat up that allowable deduction. Under the previous tax law, you could deduct all the state taxes paid, as well as your property taxes, with no limits. The new law is going to cost the average homeowner in California a majority of the tax savings they would have had under the old tax law. This is unfortunate, but hopefully not a deal breaker for those of you thinking about home ownership this year. True, part of the reason people buy property is for the tax benefits, but that's not the only reason. In my opinion, pride of home ownership, stability in housing payments, and equity gains take precedent over the tax benefits. Hopefully, prospective homeowners see the benefit of owning their own property, and continue to see the value in owning their own home.

Other minor changes: The previous tax law allowed you to claim interest up to $1,000,000 in deductions, but with the new tax law, this is limited to $750,000 in interest. This is a minor change. I don't know why it was really necessary, but this is going to cost tax payers in California interest on $250,000 a year. I would suggest talking to your CPA to see how this affects you personally.

For those of you who don't know what a HELOC is, they are equity lines of credit you can use to borrow against your home to consolidate debts or make investments. The previous tax law allowed the mortgage interest to be tax deductible. Now, it's limited to $100,000, and only if the money is used for home improvement. Homeowners can no longer use their equity like a piggy bank they can take money out of, and use for whatever they want.

Below is a chart which summarizes the new law, and how it affects all of us. I’d love to hear your thoughts on it!

The mortgage interest deduction is now limited to mortgages totaling up to $750,000 for primary and secondary homes. This means that home buyers with a 20% down payment can only deduct 100% of the interest from their mortgages if their purchase price total is less than $937,500. 

State income tax, sales tax and property tax deductions (SALT) are now capped at $10,000 total. This is a significant hit for many high tax state residents in high cost areas.

What does this mean for your bottom line? The Wall Street Journal’s tax plan calculator analyzes the impact of the biggest factors in the bill, so you can estimate your tax liability 2018 through 2027. Click here for The Wall Street Journal Tax Plan Calculator.

Bloomberg shows how taxes owed on wage and pass-through income (from a business you own) will change in 2018. These scenarios may remind you of someone you know:

• The multimillionaires in new York

• The second home scenario in California

• The small business owners in Pittsburgh

• The suburban family in Westchester

• Single in Manhattan

• Married in Austin — a young couple who rents

• Median income in Oregon

• Renting in Milwaukee

Owners and buyers of second homes can potentially turn their vacation homes into an investment property by setting up a limited liability company. That allows them to write off interested and upkeep, while using the property part of the year for themselves, according to The Denver Post. Consult a tax professional for help navigating the new tax rules and how to best structure this business. 

Source: Karen Burrous