How will the final version of tax reform affect California Housing Markets?

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FROM OUR COMPANY CHIEF ECONOMIST, SELMA HEPP

Republicans in Congress reconciled their different versions of the tax reform and offered their final version of the so-called Tax Cuts and Jobs Act today. Congress will vote on the final version next week, which is only slightly more favorable than the initial House of Representatives bill but still highly detrimental for most of California’s coastal housing markets. Below are some relevant details.

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  • Changes in the standard deduction:
    • Current: A $6,350 standard deduction for single taxpayers and $12,700 for married couples filing jointly.
    • Proposed: A $12,000 standard deduction for single taxpayers and $24,000 for married couples filing jointly.
  • Individual tax rates would be adjusted as follows:
    • 10 percent: $0 to $9,525 of taxable income for an individual; $0 to $19,050 for married joint filers
    • 12 percent: $9,526 to $38,700 individual; $19,051 to $77,400 joint
    • 22 percent: $38,701 to $70,000 individual; $77,401 to $165,000 joint
    • 24 percent: $70,001 to $160,000 individual; $165,001 to $315,000 joint
    • 32 percent: $160,001 to $200,000 individual; $315,001 to $400,000 joint
    • 35 percent: $200,001 to $500,000 individual; $400,001 to $600,000 joint
    • 37 percent: More than $500,000 individual; more than $600,000 joint
  • Corporate taxes would be reduced from 35 percent to 21 percent with other favorable deductions for businesses.
  • Pass-through deduction:
    • Current: Pass-through businesses — which include partnerships, limited liability companies, S corporations, and sole proprietorships — pass their income to their owners, who pay tax at their individual rates.
    • Proposed: Owners could apply a 20 percent deduction to their business income, subject to limits that would begin at $315,000 for married couples.
  • Estate tax exemption doubled to $11 million for individuals and $22 million for couples.
  • Child tax credit doubled to $2,000 for each child under 18 through 2024. Raise the phase-out amount to $500,000 and cap the refundable portion at $1,400 in 2018.

Housing-Related Tax Changes

 

  • Deduction of state and local taxes would be capped at $10,000, which include state and local property, income, and sales taxes. This is horrible news for Bay Area homeowners, since property taxes alone add up to more than $10,000. State and local income tax deductions, which average $16,000 for California filers who take the deduction, are thus effectively eliminated.
  • The mortgage-interest deduction would be capped at $750,000, which is slightly better than the House’s proposed $500,000 but down from the current $1 million. However, the deduction would be allowed on first and second homes. The $250,000 difference means about $10,000 less in mortgage-interest deductions in the first year of amortization
  • In total, a new buyer would lose about $25,000 in deductions in the first year of purchasing a home priced around $1.2 million. The impact is disproportionately more harmful to new homebuyers than existing owners.
  • Lastly, the final version repeals Obamacare’s individual mandate, but it retains a deduction for medical expenses and an exemption for graduate-school tuition waivers — a positive point for research universities and graduate students who live on assistant funds.

 

 

 

The information contained, and the opinions expressed, in this article are not intended to be construed as investment advice. Eric Bell and Pacific Union International do not guarantee or warrant the accuracy or completeness of the information or opinions contained herein. Nothing herein should be construed as investment advice. You should always conduct your own research and due diligence and obtain professional advice before making any investment decision. Eric Bell and Pacific Union International will not be liable for any loss or damage caused by your reliance on the information or opinions contained herein.