Buying a home in Southern California might come with significantly fewer tax breaks in 2018.
California homeowners have to borrow big bucks and pay high property taxes. These expenses have been offset by tax breaks designed to encourage home ownership, but if the proposed tax reform goes through, we can expect less tax deductions, less housing affordability and price depreciation.
Here is what we know so far:
The mortgage interest deduction up to $1 million is shrinking
This deduction would be retained for existing loans, but new mortgages are capped at $500,000 to claim this deduction.
According to Zillow, 72% of homes in our market are priced higher than $500,000. New home buyers will be hit especially hard due to less deductions for interest paid on their new mortgage and maybe worse, sellers are going to be less likely to sell because they will lose the deduction when they buy their new home.
This could have the effect of limiting inventory even further, making it harder for buyers to find a home they can afford.
The unlimited deduction for property tax would be capped at $10,000
When buying a new home, the typical property is taxed at 1.25% of purchase price. Reducing the property tax deduction will not effect deductions for home buyers that acquire houses under $800,000, but those with houses over $800K will be limited to deducting just $10,000 a year in property taxes. This does not matter to most home buyers in other states, but with a median home price approaching $700,000, it matters to us.
The one time tax exemption on the sale of your home is changing
In 2017, single sellers are able to exclude $250,000 and couples filing jointly are able to exclude $500,000 in gains from the sale of their primary residence.
To claim the exclusion and avoid paying taxes on up to $500,000 in capital gains resulting from the sale of your home, you must have owned the home for at least two years and lived in the home as your main home for at least two years.
In 2018, to claim this deduction, you will have had to live in your house for 5 of the last 8 years (if approved).
This will result in sellers holding on to properties that they may prefer to sell, thus limiting scarce housing inventory even further.
Home builders and Realtors are warning of future housing recessions if the plan is approved in its current form. The National Association of Home Builders estimates there are now 7M homes in the U.S., that with a 10% down-payment, would exceed the $500,000 interest deduction cap.
Congress wants to convince you that these losses will be be offset because they will almost double the standard deduction (single taxpayers will be able to deduct $12,000 and married couples can claim $24,000), but this is good for residents and homeowners where the cost of housing is a fraction of what we pay to live and work in California.
The Bottom Line
Nobody knows what the final tax legislation will look like or even if it will pass in any form, but one thing is for sure, the chances are almost certain that it will be more expensive to buy or sell a home and that the tax benefits of home ownership will be decreased significantly next year.
You might want to act now, before these proposals become law. If you are thinking about buying or selling, we can help.
Call us at 805-379-3300 and let one of our experts assist you before it's too late!
Thanks in advance,