Making Sense of the 2018 tax changes
Every new year brings changes to the tax laws. Here's a quick recap of some of the new laws as per the National Association of Realtors and how I see them affecting current and prospective homeowners here in the Bay Area.
1. Mortgage Interest Deduction
The final law reduces the limit on deductible mortgage debt to $750,000 for new loans. Current loans of up to $1 Million are grandfathered and are not subject to the new $750,000 cap. Homeowners may refinance mortgage debt up to $1 Million and still deduct the interest up to $1 Million, so long as the new loan does not exceed the amount being refinanced. Interest remains deductible on second homes but subject to the $1Million/ $750,000 limits for existing/new loans.
2. SALT State and Local Taxes
The law allows an itemized deduction of up to $10,000 for the total of state and local property taxes, and sales taxes. This $10,000 limit applies for both single and married filers. Original versions of this bill had eliminated this deduction altogether, so while this is less than 2017 law, it's an improvement over original proposals. There is currently some talk of changing California law to potentially eliminate the state tax requirement but allow an equivalent "charitable" donation to the state effectively circumventing the SALT $10,000 limitation. This component is just in the discussion stage in Sacramento, so stay tuned.
3. Standard Deduction
The law increases the standard deduction to $12,000 for single individuals and $24,000 for joint returns.
So what does all of this mean for housing in the Bay Area?
There have been a lot of comments and predictions of doom and gloom for the housing market. However, as we all know, the Bay Area is its own microcosm. Due to our strong local economy and job market, the Bay Area typically sees a muted version of the national market effects. By doubling the standard deduction and lowering SALT, Congress has reduced the value of the mortgage interest and property tax deductions as compared to 2017.
Much has been written about how these changes in the law will eliminate the incentive for renters to become homeowners. But, here's the most important part to remember: Real Estate is a Leveraged Investment. Meaning that on a $1 Million property, you need only put down 20% (or less) to receive gains on $1 Million worth of value.
Historically, our housing prices have increased over the long term and most likely will continue to do so in the future - you have a leveraged, appreciating asset. This will always beat out renting and should keep our housing market strong. Combined with high wages and the lowest inventory we've seen in years, 2018 should continue to be a seller's market with houses going for over asking and with multiple bids.
2018 will be an exciting year and I'm looking forward to all that it brings. If I can help support your Real Estate goals, please don't hesitate to reach out. From helping you prepare your current home for sale, to finding the next home that is just right for you ... I look forward to assisting you every step of the way.
Disclaimer: This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.