UNDERSTANDING THE EFFECT ON BAY AREA REAL ESTATE

With the recent passage of the House tax reform bill, there’s been a lot of speculation on how it will affect homeowners, especially those with pricey Silicon Valley mortgages. It’s important to note that the tax reform hasn’t officially passed into law. Let’s look at the proposed reform and what it means to Bay Area real estate.

MORTGAGE INTEREST DEDUCTION LIMIT

Current Law: One of the many reasons it’s attractive to own a home is the ability to deduct mortgage interest. Homeowners can claim interest paid on mortgages valued up to $1.1 million on first and/or second homes.

Proposed Tax Reform Change: Existing homeowners are not affected. However, for homeowners who sell and buy, the cap is reduced to $500,000. The deducted mortgage interest is available to one principal home; vacation homes are now excluded.

Bay Area Real Estate Impact: The median home volume in Santa Clara County is now over $1 million. For buyers purchasing a $1 million mortgage at 4% would pay $40,000 in interest; they could only deduct $20,000 — half of the current amount.

CAPITAL GAINS EXCLUSION

Current Law: The capital gains exclusion allows homeowners to exclude capital gains from the sale of their primary residence up to $250,000 individually and $500,000 for married taxpayers. To qualify, owners must have lived in the home at least two of the last five years. You can also claim the exclusion once every two years.

Proposed Tax Reform Change: The exclusion is the same ($250,000 for individuals, $500,000 for married taxpayers) with one exception. You lose the gains exemption if you adjusted gross income exceeded $250,000 (individual) or $500,000 (married). With the reform, you can claim the exclusion once every five years.

Bay Area Real Estate Impact: We’ve had historically low inventory. Homeowners typically sell and move between 7-10 years. Many older homeowners are reluctant to sell for several reasons such as the concern about qualifying for a new mortgage, or downsizing or upsizing is more expensive than their current mortgage payment. The gains exemption requires homeowners to stay in their home longer to qualify, further reducing potential inventory.

STATE & LOCAL TAX EXEMPTION

Current Law: State and local property taxes are deductible and there is no cap on the deduction.

Proposed Tax Reform Change: There would be a $10,000 deduction cap on the amount of property taxes.

Bay Area Real Estate Impact: The Bay Area is a premier real estate market, with the average median home valued over $1 million. Homeowners would not be able to deduct state income taxes, removing another prime tax benefit of owning a home versus renting.

WHAT’S NEXT?

The National Association of Realtors is fighting hard to protect homeowners. It’s unclear if and how the tax reform bill will evolve or pass through the Senate. If you’re inclined, write your House representative or Senator and share your views.

If you’ve been thinking about selling your home, now may be the perfect time. If you have questions about recent real estate market trends and how they affect your property, please reach out to me.

Photo credit: Mark Fischer