2 weeks ago

March 2018

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–continued from page 13 The pricier, higher-tax communities, where homeowners have jumbo mortgages and big property tax bills, are going to take the biggest hit in slowed price growth under the law, said Zandi and Wei. “The impact on house prices is much greater for the higherpriced homes, especially in parts of the country where incomes are higher, there are a disproportionate number of itemizers and where homeowners have big mortgages and property tax bills,” Zandi noted in his report. “The Northeast Corridor, South Florida, big Midwestern cities and the West Coast will suffer the biggest price declines.” Affluent housing markets throughout California — including San Marino, San Francisco, West Los Angeles, coastal communities and Pasadena, where the median home price is $930,000 — will likely absorb the brunt of the bill’s impact, but lack of housing in those markets may soften the blow. For New York City, Moody predicts a 9.5 percent drop in Manhattan home values, whereas in Brooklyn and Queens prices could fall by less than 2 percent. Fifteen of the 30 counties hit hardest in the U.S. are in New Jersey, where housing is projected to lose one-tenth of its value, according to the Moody report. There is a possibility that the pace of home sales where demand sharply outstrips supply may slow down, according to experts. Home owners could hold onto their houses even longer than planned because of tax reform, diminishing supply even further. For those who still want to sell, there should be plenty of buyers. “I just met with clients from the Northwest who are buying a house and they are pretty savvy about buying and selling houses,” said agent Steve Clark of Clarkliving in Compass real estate’s Pasadena office. “They are not happy about [the tax reform bill] but it is not a deciding factor in buying a house. People who want to sell their house and move to southern Oregon will be okay. But if you are trying to make a lateral move, where are you going to go? The real issue is lack of inventory.” Here’s a summary of the new law’s measures and how they could affect home values, sellers, buyers and the overall housing market in your community. Slashing the Mortgage Interest Deduction Threshold People who want to buy or improve a home between now and 2026 (when the tax measure expires and the law reverts to pre-2018 provisions — barring new legislation) can deduct the interest paid on mortgages of up to $750,000 — down from $1 million. The lower threshold impacts all homes bought after Dec. 14, 2017. But buyers who secured a mortgage on or before Dec. 14 can still deduct interest on up to $1 million in loan debt, the previous cap. The new tax law also killed the deduction for home equity loan interest, including that on existing home equity loans, as of Jan. 1. But the interest for 2017 home equity debt can still be claimed on 2017 taxes. In 2026, the law returns to previous provisions: Mortgage interest on up to $1.1 million in and home equity debt, alone or combined, will be eligible for deduction, once again, as long as no new legislation is passed. The law is expected to put homes worth $750,000 or more out of reach for some home buyers. The mortgage interest deduction is a prime selling point played up by real estate agents and described as a government subsidy to home ownership at a cost to the government of about $100 billion a year, according to housing experts at the American Enterprise Institute, a Washington D.C.–based think tank. Reducing the tax incentive to buy a home is expected to rattle the market. When added to the sharp cuts in IRS deductions for property taxes and for other state and local taxes, the tax spike may cause some homeowners to gasp come tax time next year. The new law will also make selling homes worth more than a $750,000 potentially unattractive to many homeowners, who might hold onto their properties longer; the prospect of upgrading to another presumably even more expensive home without the traditional deductions may be too costly. All of this will tighten an already constricted housing supply. State and Local Tax Deductions All property taxes paid to state and local government agencies used to qualify as an itemized deduction, unless the homeowners paid the alternative minimum tax, which would preclude itemization. The old law also allowed deductions for state and local income taxes or sales tax. The 2018 law combines these state and local taxes (also called SALT) and caps the deductions at $10,000 for both individual and married couples. Many homeowners in high-cost, high-tax states, such as California, New York, Connecticut, New Jersey and Maryland, pay far more than $10,000 in property taxes (in addition to income taxes). Nationwide, more than 4 million Americans nationwide pay more than $10,000 in property taxes alone, according to ATTOM Data Solutions, an Irvine-based property data research firm. Los Angeles County is among the U.S. counties with the greatest number of home loans topping $750,000 (i.e., 9,197) for 2017, according to ATTOM. Overall, 9.2 percent of L.A. County homeowners pay more than $10,000 in property taxes each year, ATTOM says. Though some homeowners rushed to pay their property taxes for 2018 early, assuming their property taxes could qualify for deduction from their 2017 taxes, the IRS stated that only 2018 taxes that had been assessed would be eligible. Homeowners who made the early payment and were not assessed before this year will not benefit from the deduction. Standard Deduction The new law doubles the standard deduction to $12,000 for people filing taxes as an individual, and $24,000 for married couples filing jointly. For some couples, the increase in the standard deduction will outweigh the benefit from itemizing deductions; that would apply to homeowners whose combined mortgage interest and SALT deductions do not add up to $24,000 for married couples filing jointly or $12,000 for individuals (although adding other deductions, such as medical expenses, may put them over the top). But the standard deductions may offer more of a tax advantage to renters than to many buyers, said Wei. “When the law increased the single deduction to $12,000 to an individual and $24,000 for a married couple, for many renters, it created a disincentive to buy,” said Wei. “People may decide to rent for a little longer so they can take advantage of the tax savings, and they may not think they need to be a homeowner now. –continued on page 16 03.18 | ARROYO | 15