The new tax bill and real estate: Here’s what you need to know:
By Dave Eshleman
Now that the “Tax Cuts and Jobs Act” is in place, many homeowners in the high-priced Bay area are wondering how they will be affected. Although some will benefit, many homeowners will be worse off under the new law.
The biggest impact will be on mortgage interest deductions. If you must borrow $1 million to purchase a home, for example, you can deduct the interest only on $750,000. If your rate is 4%, your deduction will thus be reduced by about $10,000 per year. If you’re in a combined state and federal 40% tax bracket, that MAY mean you’ll pay an additional $4,000 in taxes.
Under the old law, you could deduct interest on the first $1 million of mortgage debt, and additionally on the first $100,000 of a home-equity line of credit.
If you received a loan on your primary residence after December 14, 2017, you’ll be subject to the new limits. But thankfully, if you closed escrow before 12/14/17, you’re “grandfathered”. And you can refinance your existing $1 million loan with full deductibility as long as the new loan amount doesn’t exceed the old one.
The interest on a home equity line of credit (HELOC) or second mortgage can be deducted as long as the funds were used for home improvement, but otherwise you can no longer write off HELOC interest.
You can deduct mortgage interest on your vacation home, but still subject to the $1 million/$750,000 limits.
Mortgage interest on investment property has never been deductible against your regular income, only as an expense against that property’s passive rental income.
The next big impact for Bay area homeowners is the deduction for state and local taxes. The final bill allows for a total $10,000 deduction for combined property taxes, and state income and sales taxes. If you paid $1 million for your home, it’s likely your county property taxes already exceed the limit by about $2,500 per year! And if you prepaid your 2018-2019 taxes in 2017 in order to avoid the new limits, sorry! The law specifically precludes you from benefitting from that pre-emptive move.
Finally, the new law doubles the standard deduction to $12,000 for individuals and $24,000 for joint filers. Thus Congress has greatly reduced the value of the mortgage interest and property tax deductions as incentives for home ownership. It is estimated that only 5-8% of taxpayers will now be eligible to claim these deductions by itemizing, meaning there will be no tax differential between renting and owning for more than 90% of taxpayers. And if you believe the doubling of the standard deduction is a good thing, the law repeals personal exemptions ($4,150) which greatly mitigates and in some cases eliminates the positive aspect of the higher standard deduction.
By the way, the original House version was far more draconian. It would have reduced the mortgage interest deduction to $500,000, and completely eliminated deductions for vacation homes and state and local taxes.
There are a slew of other real-estate-related changes for investment properties, which we will tackle in future newsletters.
Although our high prices are primarily a result of high demand and low inventory, the new tax act will have an impact on home prices. If you’re trying to buy, you may see that as good news. But as a total package, the act does not seem to encourage home ownership, and it’s hard to ignore the fact that this partisan Republican legislation hurts high-cost areas that have traditionally voted Democratic: The West Coast, New York, and Hawaii. You may take the position that no one will feel sorry for people who can afford $1 million mortgages, but that’s what many of us are forced to borrow in order to buy “average” homes around here.
I am not an accountant and cannot give tax advice. Please consult a tax professional to see how the new law will affect you.