So now that we have some particulars on the house tax bill, I’m wondering what folks think the implications would be for the bay area were it to pass. We can tally the costs:
Limit mortgage deduction to $500K loan value (prev $1.1M). At 4% interest, that’s $24K increase in taxable income.
Property Taxes Limited to $10K deduction (prev unlimited). Now on a $1.5M home instead of being able to deduct $18 of property tax, you would be limited to $10K. That’s an $8K increase in taxable income.
State Taxes no longer deductible. To afford a $1.5M home, one assumes a likely $250K+ income. So taxable income will increase probably more than $25K. Of course this will happen whether you buy a property or not, but since non-homeowners don’t have interest and property tax deductions, they would find it easier to stay under the standard deduction, so the impact is not as great for them as it will be on homeowners in terms of changing their tax picture.
Most of the reduction of tax rates impacts those that were high income folks above $400K who were paying 39.6% that get a break to 35% now until $1M. At the lower end of the scale the changes look nominal.
All in all, the loss of $35K deductions is going to be worth probably a $15K increase in taxes offset by rate reduction of about $4-5K, so homeowners are going to have $1K a month less to put into a home purchase, so I assume this will perhaps translate ultimately into as much as $100K price reduction on a $1.5M home which would translate to perhaps a 7% price reduction – not the end of the world for a strong real estate market. Still, I do forsee much softness in the market as it sorts things out.
AMT? I thought that the average homeowner with a higher income can’t get to use all the deductions anyway.
So the elimination of the AMT may actually benefit a lot of bay area homeowners
Oh boy. AMT implications are a toughie. Yes, AMT does disallows SALT (state and local tax) deduction, but AMT rate is 28% (with a large exemption that covers the lower income levels). Since homeowners typically have marginal brackets of 31%, 35%, or 39.6%, there’s typically enough headroom to stuff in at least part of the salt deduction unless you have a large family in which case the disallowed personal exemptions kill you. Now it will be all gone, but you’re right the impact in terms of combining state tax+property tax is really perhaps a loss half as big as I previously mentioned.
Otoh, mortgage interest deduction is not impacted by AMT except to the extent that it makes it that much more difficult to benefit above the standard deduction without state/local deduction.
But then again, in the bay area maybe it will be boon to homebuyers because now employees will be able to cash in stock options and hold the stock without having to pay AMT (unless they added some extra code to cover this), so now ISO’s will be able to safely get capital gains treatment without risking a large AMT liability.
Just to name a few common examples, here are some of the deductions you would need to add back into your taxable income when calculating your AMT:
State and local income taxes
Real estate and personal property taxes
Miscellaneous itemized deductions, such as employee business expenses
Interest on home equity loans
Deduction for a net operating loss
The standard deduction, if you took it instead of itemizing
I think the State income tax is the biggest trigger for AMT.
So the sting of the loss of that deduction should be offset substantially… No matter what the wealthy will figure out how to beat the new tax system…
Anything to upset the way we homeowners do our taxes will have a huge impact in the way we live in the Bay Area. We can’t deduct mortgage interests, we are doomed. Time to pack up and leave.
Oh…that would trigger a sellout enough to create a problem for the RE market.
Somehow, some people I know selling his homes and leaving for the valley or other states weren’t truthful about knowing something. But I knew they knew something was coming.
Bay area resident here. I re-did my taxes for last year with the new tax brackets and deductions. The taxes with the new rules would be $500 less. We have been paying AMT over the last few years and after re-doing the taxes with the new rules, I came to the conclusion that the new taxes does not actually eliminate AMT but rather apply AMT for many more people. So taxes would be very similar to previous years.
The marriage penalty is now at $260,000 and progressively disappears after that. So there is actually a benefit in trying to earn more.
The biggest game changer is the reduction of mortgage deductions as it would not trigger AMT previously. As a poster previously mentioned, for someone taking a $1 million mortgage now, at 4% interest rate, his taxable income will increase by $20,000. So for a high earner, this increases taxes by $1000 per month which is a big deal.
The top 10% of the nation already pay 75% of all taxes. California is mostly in the top 10% of wage earners nationwide… We pay enough already… But this tax bill mainly hurts a few with high mortgages… Just move your money around and avoid a high mortgage… The million dollar cap has already hurt the BA… not many complaints about that…mortgage your rentals and get a lower mortgage on your home… not a big deal for people making $200k or more
AFAIK, existing homeowners can keep the deduction but future purchases will be capped at $500,000. This means people with high mirtgage will not likely move up. Less inventory in the market i guess.
Assuming 20% downpayment and wanting to get FULL mortgage interest deductions -
There’s nothing available in the Bay Area for less than $625K. ($500K/0.2)
