December 1, 2017

Trump Tax Plan for Homeowners

The most common question we have been helping clients address over the past couple of months is, “what is Trump’s Tax Plan and how does it affect me?” The details have been murky at best as there have been 2 versions of the bill proposed, one from the House and one from the Senate. Add to that some shorthand language on items that contain considerable nuance, and you have yourself a recipe for considerable confusion. The tax plan has been promoted, by the Trump Administration, as a tax cut to the middle class. But as you might rightly suspect, that is not an absolute. In the upcoming Blog posts, we will center in on specific areas, ripe with candid commentary. To start, let’s discuss the changes for homeowners and the overall risk posed to the housing market by this legislation. I apologize in advance for the pessimistic tone that follows.

If you are a homeowner with a family in a state that has their own income taxes, this tax plan, my friend, was not made for you. Under the combined bill as it currently stands, taxpayers will only be able to deduct up to $10K in state and local taxes. Here in San Diego, a modest home would carry a property tax bill that would eat up that $10K in the blink of an eye. Thus, that leaves state income taxes essentially non-deductible. Or, looked at from the opposite side of the coin, property taxes won’t provide any benefit to you if you have $10K or more in state income taxes. Adding fuel to this fire is the cap on mortgage interest deductions. If you get a loan that is greater than $750K, or have multiple loans that in aggregate exceed $750K, you can’t deduct interest on the portion that exceeds $750K. This will apply to new home purchases (current mortgages are grandfathered), likely beginning in 2018. Take a deep breath, it gets more convoluted.

The Trump administration would very eagerly point out, “hey you snarky, number-crunching nerd, did you miss the fact that we are doubling the standard deduction from $12K to $24K for married taxpayers and from $6K to $12K for single taxpayers? This is a HUGE (pronounced “HUUUUUUUUGE”) win for the middle class, and it doesn’t benefit me, BELIEVE ME.” Current estimates are that only 6% of taxpayers will itemize deductions under the combined plan. The fact is, there are very few situations where a home will be of material benefit to a taxpayer unless they have other significant itemized deductions, some of which are also being eliminated. If you don’t think that this tax reform in combination with rising interest rates won’t significantly impact the housing market, well, then, we’re going to have to agree to disagree.

When it comes to kids, the tax code used to provide incentives to ease the financial burden of a dependent child. Not anymore. Previously, you would get a $4K deduction per member of your household. You now get no deduction. Fantastic.

So, to recap, your home just became of little-to-no tax benefit and you lost all of your personal exemptions for your entire family. Take that, Middle Class. You’re likely asking yourself, “who is benefitting from these changes and how do I get on that side of the fence?” Glad you asked. We will cover that on our next post.

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