Welcome to 2018 and the new tax reform laws!
There have been a lot of changes to the tax code and we have been getting lots of questions on what this all means for mortgages and real estate moving forward so I thought I would highlight some of the good parts and bad parts of the new tax laws. As always, please consult a tax professional for specific tax questions and please do not consider any of this tax advice.
Congress was ready to severely limit the all-important “Capital Gains Exclusion” for the sale of primary residences by changing the requirement to have occupied the home 2 out of the last 5 years to 5 out of the last 8 years which would have been a real game changer for the California real estate market. Fortunately, in the final version of the bill congress changed it back to 2 out of the last 5 years. This means that you still have to occupy your primary residence for 2 of the last 5 years to get the $250,000 (single) or $500,000 (married) capital gains exemption. This is the biggest single win for homeowners and the country. Real Estate is the engine that moves the economy forward and if the tax reform bill had gone to 5 years before you could sell and exclude capital gains that would have slowed our economy immensely.
Before this latest tax reform it used to be that you could deduct mortgage interest on your primary residence up to a $1,000,000 loan amount but now taxpayers can only write off interest on the first $750,000 for all new mortgages taken after 12-15-2017. Coupled with the $10,000 SALT (State and Local Taxes) maximum deduction this may cause some people to reconsider buying real estate but I think the effect will be muted even if you have Mello-Roos taxes. For example, if you have a household income of $200,000 with the lower tax brackets and no state & local tax deduction aside from the $10,000 for property taxes you would still save about $1800 in Federal taxes as compared to 2017.
Another change expected to affect some markets is the elimination of mortgage interest deductions on second homes which may affect certain locales that have a lot of second homes but most folks that can afford second homes can afford more taxes. Those that are well off are certainly seeing an overall net benefit from this new tax bill so again, the effect of this change will be muted. 1031 exchanges were more or less left alone for real estate investments which is very good news for the real estate market and investors alike because at one point that was on the chopping block.
One of the biggest changes that may require action by those homeowners with significant home equity debt is the fact that home equity debt is no longer tax deductible. This is a big deal for folks that have high balances on their equity lines and loans. Coupled with rising interest rates from the Fed, it is really a call to action. Most equity lines are 5% or more right now with the prospect of rising another 1/2 – 3/4% by the end of 2018. Folks would be wise to refinance this debt into their first mortgages where rates are hovering in the high 3’s or low 4’s and continue to enjoy mortgage interest tax deductibility up to a loan amount of $750,000. Please contact us for a no obligations analysis.
Overall the tax reform bill is expected to save everyone money regardless of income level. Real estate took some lumps but we escaped the worst of it and viewed as a whole real estate is still one of the best, most tax advantaged investments any household can make. Please contact me with any questions or anything I can help with and best wishes for 2018 and all that lies ahead!
Rob Scheuing, President of Sherwood Mortgage Group | 805-496-2512