Aside from providing shelter and being a pretty decent financial investment for capital appreciation, home ownership has historically afforded those fortunate enough to own a home some very nice tax benefits. The interest on the primary and secondary mortgages, the property tax, and a healthy portion of any capital gains realized from the sale of the home are just the major tax deductions that have long enticed people to purchase homes.
For many decades, lawmakers have taken a run at one or more of these home ownership tax breaks as a way to generate more revenue. It seems as if every 4 years, the mortgage interest deduction is in the cross hairs of Congress, only to be repeatedly rescued as a result of pressure applied by concerned homeowners, and the lobbying power of the National Association of Realtors.
Fast forward to the present, and what appears to be one of the most aggressive tax bills targeted at eliminating home ownership tax breaks has been introduced in the House of Representatives. According to the California Association of Realtors, the following changes are loaded into the proposed Tax Cut and Job Act:
- Lower the mortgage interest deduction cap from $1 million to $500,000.
- Eliminate the mortgage interest deduction on home equity loans.
- Eliminate the mortgage interest deduction on second homes.
- Cap property tax deductions at $10,000.
- Extend the qualification period for exclusion of capital gains tax on the sale of a primary home from two out of the last five years to five out of the last eight years
Another major provision that affects both homeowners and renters alike is the push to eliminate both your state and local income tax as a federal tax deduction. Ouch…
This plan hits every homeowner squarely in the checkbook, and it’s casting a cautionary shadow on the psyche of home buyers in this market. But it really hurts those who have purchased their homes most recently, simply because they have much larger mortgage balances and property tax bills to contend with. For example, if you just use the current average sales price of $2,000,000 for a San Carlos home, and assume that the buyer financed 70% of the purchase, they stand to lose:
- For a loan balance of $1,400,000 they lose $500,000 of deductible mortgage interest.
- Assuming ~ 1.1% of the purchase price as their property tax rate, they can only deduct $10,000 out of what will likely be an annual property tax bill of $22,000 — or a loss of $12,000 of potential write-offs.
By contrast, it has less of an effect on longer-term homeowners because their loan balances will likely be much lower, and they likely have enjoyed the benefits of Proposition 13 which curbs the growth rate of their property taxes. But whichever bucket you fall into, this plan is going significantly impact your taxes if it passes as-is.
There will certainly be significant debate in Congress about this sweeping tax reform. Historically, any attempts at eliminating the tax benefits of home ownership have been soundly shut down. But considering where politics are today in America, it’s dangerous to assume anything.
So what can you do? Whichever way you feel about the proposed tax plan, contact your local elected officials and make your voice heard.
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