On December 17, 2017 the new tax law, called the “Tax Cuts and Jobs Act” became law, despite the fact that 55% of Americans disapprove of the bill, according to a January Gallup poll. Much of the disapproval is aimed at the significant tax cuts for corporations and the very wealthy, but people are also concerned about the impact of certain provisions on homeowners. According to California Association of Realtors President Steve White, “…this legislation attacks home ownership by reducing incentives for people to buy homes.”
Since this new law passed, I’ve had many inquiries from San Diego clients, nervous about our local market. Is now a good time to buy or sell? Should I just wait and see what happens? What will this mean to home values?
Let me preface my thoughts on the subject by saying that I’m not an economist or tax expert, but as a broker I stay up-to-date on real estate news. I’ve gathered the following information to help clarify what these changes in the tax laws mean for San Diego County.
Mortgage Interest Deduction (MID)
Under the new law, interest paid on mortgages acquired prior to December 15, 2017 may continue to be deducted up to a loan amount of $1,000,000 on a primary residence and qualifying second home. For mortgages originated after December 15, 2017, the MID is capped at $750,000 of the loan amount for tax years 2018 – 2025 for both primary and qualifying second residences. In 2026 the $1,000,000 loan limit is reinstated or by that time might be re-legislated. Additionally, under the new tax law a homeowner can no longer deduct interest paid on home equity loans effective tax years 2018 – 2025, no matter when the loan was originated.
State and Local Tax Deduction (SALT)
Currently taxpayers can deduct all of what they pay in individual state income tax, sales tax and local property tax on their federal return. With the new law, the total deduction for all three types of taxes is capped at $10,000.
Impact on San DiegoCountyHomeowners
The local impact of the reduced MID will effect buyers depending on the size of their mortgage. If you are buying a home for $600,000 and putting down 10% your mortgage will be $540,000 and the interest you pay will be tax deductible. However, increasingly county home prices are topping $800,000 – $900,000 in many areas. For instance, buying a home in Encinitas for $1,100,000 with 20% down gives you a mortgage of $880,000. Interest can only be deducted up to a loan amount of $750,000 leaving no deduction on the interest paid on $130,000 of the loan.
While the reduced MID will primarily impact San Diego home buyers in the more expensive areas, I believe that the reduced SALT deductions will have a greater effect. Using the purchase example noted above of $600,000, the property taxes are roughly $7500 a year. With deductions capped at $10,000 that leaves only $2500 that could be deducted based on payments for state income or sales tax. On that $1,100,000 home, annual property taxes are approximately $13,750, which obviously exceeds the $10,000 limit with no opportunity to deduct for state income or sales tax.
From my perspective, I believe the lowering of these deductions could mean that some people will think twice about purchasing a new home, and may postpone a move especially to a more expensive home. If there is reduced competition we could see a slow down of the hosing price increases we’ve witnessed for the last two years, particularly in the higher price ranges.
Will these new laws deal a significant blow to the San Diego housing market? That is unlikely. San Diegans are used to paying more for housing expenses than other areas of the country and have learned to adjust accordingly. While I disagree with the reductions in these two deductions, I think their impact across the San Diego market will be minimal, though many families may notice the bottom line tax impact of fewer deductions, as noted above.
If you’re ready to buy or sell, I wouldn’t let this new law stand in your way. I’ll be happy to produce a net sheet to show you exactly where and how I can save you money and still keep you happy in America’s Finest City.
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