mortgage interest deduction

Trump’s new tax plan limits deductions and could further intensify inventory shortages

While the proposed tax plan promises to save an American family about $1,182.00 per year, some of the proposed changes will negatively impact current and future California homeowners. Even with favorable changes to the tax bill in the Senate version, many of the proposed changes will be a challenge to the California housing market, especially in Los Angeles.

Here is a quick summary of a very informative article on the subject provided by our chief economist Selma Hepp. We highly recommend you check out her recent Economic Straight Talk as well as this recent article in the Los Angeles Times – Realtors are worried about Trump’s new tax plan. California homeowners should be too

A few key takeaways

*The tax proposal increases the standard deduction from $6,350 to $12,000 for individuals and $12,700 to $24,000 for married couples. Thirty-four percent, or about 6.12 million, California taxpayers itemized their deductions in 2015, with average total itemized deductions equaling about $36,800. This will make a notable difference in their adjusted gross income.

*Removes the ability to deduct state and local income taxes which will markedly increase taxes for many California residents with incomes above $75,000.

 *The proposed changes are more impactful on future homebuyers since some of the proposed changes would apply to newly originated mortgages.

*The lower cap on the mortgage interest deduction would be particularly detrimental to buyers in Los Angeles communities where median prices exceed $1million. For example, a buyer of a $1.2 million home with a $1 million mortgage would pay almost $40,000 in amortized interest in the first year. However, at the $500,000 mortgage interest deduction cap, the buyer would be able to deduct only half of that interest, thus losing about $20,000 in deductions. Again, if this is a first-time buyer and falls in the income range of between $100,000 and $200,000, the loss of a $20,000 mortgage interest deduction would make a notable difference, not only in the resulting tax bill but also on the decision to purchase a home. (The current senate proposal has adjusted this cap back to $1 million.)

*While the proposed tax plan reduces the number of tax brackets, not everyone’s tax rate will decrease, and these deductions will play a big role in where a household falls along the income spectrum.

*A $10,000 cap on real estate property taxes would also impact those buying a home priced above $1 million, since California property taxes are around 1.2 percent. In Los Angeles metro, 20 percent of home sales year to date were priced higher than $1 million. For example, a buyer of a $3 million home would lose $20,000 in property-tax deductions. 

*The proposed change that limits the capital-gains exemption used by homeowners when they sell would be another major blow for supply conditions. Under the new proposal, homeowners must have owned and lived in the home for at least five of the last eight years to qualify for the exemption. Currently, the rule is two of the last five years. The exclusion would also be limited to one sale every five years rather than one every two years. In addition, households with incomes over $500,000 if married or $250,000 if single lose the exclusion. With the current capital-gains exemption limit at $500,000, it already poses a constraint on many current owners whose homes have appreciated significantly since they purchased them and who consequently choose not to sell. Further limiting the use of the capital-gains exemption will slow housing turnover even more. At the end of the day, while severely undersupplied inventory may help push prices higher, the proposed changes would lead to fewer home sales and an even more difficult environment for first-time buyers.

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