The 2018 Tax Act: Impact on Bay Area Homeowners

By: Jim Walberg, staff writer for The Bay Area Team

NOTE: Contact your tax professional regarding how the 2018 Tax Act will impact your personal situation. Nothing in my article is intended to act as a tax expert or tax consultant. There are lots of resources for you the check out. Got it?

The new Tax Act will have an impact on Bay Area homeowners. Some will not notice any impact and many will. Let’s start with a brief summary of the three most important aspects of how the new Tax Act will impact Bay Area homeowners tax returns as it applies to real estate, mortgage deductions and capital gains..

Mortgage Interest

Last year borrowers could deduct interest paid on a mortgage amount up to $1 million. The tax bill now limits the amount of interest paid on a mortgage amount up to $750,000 for loans after December 31, 2017. The interest deduction for loans of up to $1 million before this date are grandfathered in. So, what’s the math?

If you were to obtain a new $850,000 30-year fixed mortgage with a 3.75% interest rate, you’re paying about $31,875 per year in interest. With the new tax law you are only able to deduct $28,125, since that would be the amount of interest you would pay for the same loan for the new cap of $750,000.

In the Bay Area where larger loan amounts are common, this may change a taxpayer’s decision to itemize or not. With the standard deduction increasing to $12,000 for individuals, $18,000 for heads of households, and $24,000 for married couples filing jointly, many homeowners may find it is more beneficial to use the standard deduction as opposed to itemizing line by line. Contact your tax adviser for the details of your person tax return.

Property Tax / State Income Tax

Last year, homeowners were able to deduct all property taxes and State income tax they paid when filing their taxes. The Tax Act caps this deduction to a total of $10,000 for both items. Assume you put 20% down when you got a $1 million loan. This means you purchased the home for $1.2 million, making your estimated property tax about $15,000. With the new tax law you are only able to deduct $10,000 of your property taxes.

The further downside of the Tax Act is that you cannot deduct more than $10,000 for both your property taxes and your State income taxes. In 2017 you were able to deduct 100% of your property taxes and your State income taxes from your Federal tax returns. This will greatly impact many homeowners in the Bay Area when filing their 2018 tax returns..

Capital Gains

Last year homeowners were exempt from paying capital gains taxes on gains up to $250,000 or up to $500,000 for married couples when selling a primary residence. If you lived in your home two of the last five years and you sold the home, you would be able to keep up to $250,000 of the profit if you were a single person and up to $500,000 if you were married – tax free, and you would pay capital gains for any gains above these amounts. The original draft of the Tax Act changed these dates to three out of seven years. However, it was revised to stay the same as past years. So, no change.

My Predictions

Businessman holding a glass ball,foretelling the future.

Homeowners who are thinking about moving for life changing reasons will refer to the tax changes when deciding to actually make a move. We believe that many of these voluntary life moves within California – jobs, kids, marriage, may decide to stay in their current homes for many reasons. Several of these reasons are; they have a very low mortgage interest rate; their property taxes are much lower than $10,000; because of the low inventory of homes for sale, they are fearful that there will not be a home to purchase if they sell their current home.

OK, so how will home values be impacted by the new Tax Act? The research company we refer to most often when asking this question is CoreLogic. Every month they release their Home Price Insights. They make a 12-month forecast on where they believe residential real estate will be. Even with the Tax Act’s impact on the tax filings for homeowners, they believe there will be a 4.2% increase in home values nationwide. We expect that the East Bay will have a 3% increase in home values this year. So, the Tax Act will have an impact on many homeowners in the “coastal states”. However in the Bay Area we do not expect a significant impact on home prices.

Until next time… Jim Walberg