I've been getting a lot of questions about the recent tax changes and how they will affect our local South Bay real estate market, so here are my two cents on the subject after considerable research and experience on the subject. For starters, if you'd like to learn about the entirety of the tax law, here are my favorite articles for an overview: www.bloomberg.com and www.nytimes.com.
The way I see it with regards to our local South Bay real estate market, we're going to be getting some direct effects, but also some indirect effects from the law. Let's start with the direct effects:
Mortgage Interest Deduction - Currently deductible mortgage interest is capped to loan amounts of $1 million. That will now be limited to loans of $750,000 or less. Since we have high home values here in the South Bay, this will have a much larger effect on us than it will in many parts of the country. For example, if you're buying a home for $1.5M with a 4% APR mortgage loan, then you will be able to deduct $250k less of the mortgage interest than before. At 4% APR, that mortgage interest comes out to $10,000, and if you pay 33% taxes, then that comes out to $3,333 more that you'll be paying in taxes every year. Also, home equity loan interest is no longer deductible for anyone.
State and Local Tax Deductions - Previously, you could deduct the amount you paid for state and local income taxes, including property taxes. You may now deduct only up to $10,000 total for all combined. Consider this: If you buy a $1.5M home, your property taxes alone will be assessed at $15,000 for the initial year. Even without taking state income tax into account, you'll already be paying more in taxes. When the state income tax is added it is even more substantial.
Indirect Effects - while the changes above are what most real estate folks are talking about, I'm not so sure that in the end the indirect effects may not have a greater effect. Relocating expenses, alimony, tax preparation expenses, losses for most fires and floods, and some investment fees are all no longer tax deductible. Also, taxpayers will more quickly find themselves in higher marginal tax brackets due to the change to chained CPI.
Also, because the individual mandate has been removed, most insurers are predicting a sharp rise in health insurance premiums.
Lastly, and not actually related to this, recently China announced that they were going to stop purchasing US debt. [and here is a great article on the subject: bloomberg.com] while this may indeed have been a political ruse, this -- along with a red hot stock market -- have caused mortgage interest rates to rise.
Analysis - I find it hard to believe that all of these combined won't have a noticeable effect on South Bay home prices. Fortunately, however, we're starting from a red hot market these last few years. I think this will put pressure to return to a more balanced market here in CA, which could be a relatively good thing for some people - especially for first time homebuyers. However, I'll be keeping my eye on interest rates; if they go up above 4.5% or even 5% (does anyone even remember those days) then we'll definitely have cause for greater concern.
I hope this info helps, and feel free to contact me if you have further questions or insights. -- Ed Marill
Further reading and source material: abc7.com, forbes.com, mercurynews.com, mansionglobal.com, ocregister.com, manatt.com, cnbc.com, businessinsider.com