What New Tax Bill Means for You

Posted by Alex Narodny on Friday, December 1st, 2017 at 3:02pm.

What New Tax Bill Means for You

The 2017 Tax Reform bill is inching closer to reality. Since most Californians are on edge about the new laws, we thought it would be helpful to highlight the importance of the new potential tax laws with emphasis on Real Estate implications.

At Narodny Real Estate, we are not writing this as a Democrat or Republican, but as Real Estate professionals. Our opinion of this tax bill is, well, that it’s horrible for the housing market. Downright awful. Let us dip your toes into this new Trump tax dimension.

According to Inman, here are the takeaways:

  • Reduction of mortgage interest deduction for new buyers

    • Previously at $1,000,000, the new cap for mortgage interest rate deductions will be at $500,000. Given that the average price is now about $1,300,000 in Marin County, this is a significant downgrade in affordability. However, this new law would only be incorporated for new buyers, leaving the old law in place for existing homeowners. What do we anticipate this will do to seller motivation and new inventory? With this new legislation, I don’t even think people will go outside anymore much less sell their homes.

    • To Illustrate what this means for new buyers, see the following chart:

Purchase Price

Loan Amount w/ 20% Down

Interest paid/year @ 4% interest rate (estimated). New bill makes this expense non-deductible.

$700,000

$560,000

$13,409

$1,000,000

$800,000

$19,100

$1,200,000

$960,000

$22,900


  • Requirement for people to stay in their home for longer to get capital gains exemptions

    • Previously, you could exempt $250,000 of your capital gains if you’ve lived in your primary residence for two of the past 5 years. Now, you have to live in the home at least 5 of the last 8 years. It’s unlikely that this level of capital gains will be experienced in most markets in a 5 year span, but it’s a notable change in luxury markets.

  • Homes with high property taxes become less desirable

    • Currently, you can deduct your state and local property taxes from your federal tax bill. The new bill puts a $10,000 cap on this deduction. For some Americans, this is no big deal. For a market like Marin, this will put a further chokehold on a very tight market.

  • Elimination of moving expense deduction

    • Pouring salt on the wound. Why? I do not know. It’s not going to make a huge difference between a decision to buy or not buy, but it certainly seems like this deduction could have stayed in there to help the taxpayer out during the financially painful experience of moving.

  • Buying a second home just became more expensive

    • Existing owners of second homes can no longer deduct the interest of homes worth over $500,000. This significantly increases the carrying cost of virtually all vacation homes in Northern California.

  • Advantages to Investors

    • Weirdly, the new bill preserves some tax advantages for investors, but not for homeowners. Investors can still deduct interest on their loans and property taxes with no cap. Additionally, all maintenance costs and depreciation deductions remain the same. Also, 1031 exchange laws remain intact.

You can argue that this tax bill will provide small tax cuts to some segments of the population, but this is objectively bad news for new homeowners and real estate brokers. As someone that wants to see higher inventory and a less competitive market for today’s buyers, this is likely a step in the wrong direction.

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