The Mortgage Interest Deduction Effect on California Real Estate

Tax reform is this holiday season's hot topic. The MID and real estate are much like conjoined twins. Taking away the MID could be a killer to California real estate.

The proposed cutback to the mortgage interest deduction (MID) scares me. My concerns start with the effect on real estate, not just in the Santa Ynez Valley, but in the state of California and potentially throughout the nation. Paring back the MID from interest on $1.1M to interest on $500k while increasing the standard deduction, eliminates the financial incentive to purchase a home. The tax benefit to buy a home worth $300k is gone. The standard deduction will provide a lower tax basis. That price point is common throughout the country, not so much in California, though. The purchase of a $600k home which is common n California, will provide only a minimal tax benefit.The incentive to buy an entry level home in California is diminishing. Homeowners wanting to move up are truly losing out. They will have no improvement in tax benefits when moving up to a home with a $1M loan. It appears that incentives to purchase a home are disappearing. If the tax reform allows for the standard deduction to adjust for cost of living increases, the benefit of the MID could completely disappear in ten years.

If these assumptions are right, it appears that the rate of home ownership will go down. This translates to less people having skin in the game. That means less people having a financial commitment to our social structure. This could be another facet for social unrest.

Bear with me on the explanation why this isn't going to happen. If this were a zero-sum game, these changes to the tax code would generate a significant hit to the value of real estate and create significant social effects. Focusing on economics, taking away the incentives will cut the demand. To add balance to the supply side of the equation, prices will decrease. Furthermore, the housing affordability index in California has dropped to 28%. Few people can afford to buy a home in California even before this tax reform is implemented.

Is the sky falling? I truly believe everything I've stated here, but... What is going on with our stock market? It's going through the roof. Is that the sign of a bubble? I don't think so. These increases in the stock exchanges are based on the tax advantages that will result from the currently proposed tax reform. Some may think the corporate world is getting rich, but there is so much more to it than that. The investors are making money. Jobs will be increasing and pay scales will go up to compensate for the demand of skilled workers. This appears to be a beginning of a bullish business cycle. If that is the case, the proposed tax reform will boost the economy and subsequently, government tax receipts. In a good business cycle, real estate will perform equally as well.

In the midst of all this doom and gloom due to the significant reduction of the MID benefit, there appears to be a silver lining. Tax reform looks like it will provide a large boost to the economy which will benefit all; businesses, individuals, the national debt, and of course, real estate. For the same reasons the sky might be falling, it is likely to be the change that provides a big boost to the nation by putting the money in the pockets of the people that drive the economy and want to improve their standard of living and buy an entry level home or to move up in the world. This period of turmoil is looking like an opportunity to take advantage of start of a strong real estate market rather than a death blow to real estate.

RodneySmeester
RealtorⓇ
BRE # 01925202
ph; 805 453 6000

Now for the Santa Ynez Valley real estate: The November 29th caravan in Santa Ynez was a yawner. The holiday season tends to be a bit slow, but there were two properties worth mentioning. 2939 Quail Valley Road is a one acre property with considerable views and a pool. It has just come on the market and is listed at $949,000. The other property that I noticed was in Solvang on 264 3rd Street. At $675,000, this was a nice little 3 bedroom/3 bath charmer located close to the center of town.

For more information, please visit us at Central Coast Landmark Properties.

Real Estate? Tax Reform? ...And the Upcoming Holidays?

I could talk about the Santa Ynez real estate market continuously for the rest of my life, but the holiday season is upon us. Real estate has little to do with this time of year and it tends to naturally slow down a little, so I will limit my discussion on real estate. Two properties should be mentioned though. 1259 Deer Trail Lane is new on the market. It's a 4 bedroom/ 2 bath home on an oak studded acre with views for only $795,000 in Santa Ynez. It won't last long. The other property that needs to be mentioned is at 1145 Arroyo Mesa Road. It is a 62 acre property in the Ballard Canyon AVA listed at $2,395,000. It has a magnificent building site with a shared well, horse facilities including a 20 stall barn and two apartments. It was originally listed at $3,100,000. This could be a spectacular property with the proper vision.

Why is it that, typically, tax issues occupy the holiday season discussions? This year is no different. Tax reform is looming out there and it appears that it will likely happen. Nobody can tell us for sure what it will be, but it looks like congress will come up with something. I'll be surprised if it pleases anyone. If the proposed mortgage interest deduction limitations stay, this legislation will take away the purchase incentive for the entry level California homebuyer. How that influences the rest of the California market is a topic for discussion. Let's leave this topic for the month of December. We'll have plenty of time to discuss it then. For now, let's just enjoy Thanksgiving with our family and friends. Forget about our social concerns and issues for one moment. Be thankful for our blessings and enjoy one day without the weight of the world on our minds.


Happy Thanksgiving!




RodneySmeester
RealtorⓇ
BRE # 01925202
ph; 805 453 6000

For more information, please visit us at Central Coast Landmark Properties.

Still More Wanking About Tax Reform and Its Effect on California Real Estate

Real Estate in the Santa Ynez Valley has been cruising along for several years now. Recently, the Santa Ynez Valley appears to be doing a little better than the rest of the county. That isn't what I want to discuss here, today. The tax reform discussions are much more pertinent. There are two topics that concern me. The first concern is that the reforms will effect California real estate. The current tax reform package subtly eliminates the mortgage interest deduction. By increasing the standard deduction to $24,000 and limiting the mortgage deduction to interest on up to $500,000, the tax laws allow no financial benefit to claiming the mortgage interest deduction (MID) at current interest rates. The elimination of state and local tax deductions, medical deductions, and limiting property tax deductions provide little to no benefit to the MID and itemized deductions in general, especially when a $500,000 loan at 4% is only $20,000. If this is all a taxpayer has to itemize, the standard deduction is the better tax benefit. The MID is no longer an incentive to owning a home.

We might think that taking this deduction away will put a heavier tax burden on the wealthy, but this is not true. The wealthy will be somewhat effected, but currently MIDs are already limited to interest on $1.1M. People with jumbo loans of $5M can only deduct roughly 20% of their interest. With the proposed tax reform, that will change to roughly 10%. A couple buying an $800,000 first home in California, with a down payment of $160,000 will have a $640,000 loan with a $10,000 annual property tax payment. The annual interest at 4% is $25,600. The income deduction is limited to $20,000 so the total deductions would be $30,000. A benefit of $6,000 compared to the proposed standard deduction. With a marginal tax rate, the benefit is about $1,200. With today's taxes, the benefit would be a $23,600 income deduction. With the same marginal tax rate, the tax benefit is $4,720. The proposed tax reform cuts this benefit 75% to the people purchasing homes in the entry level range in the Santa Ynez Valley. Don't forget, this buyer just spent $160,000 as a down payment. The buyer gets a home but the mortgage and lack of tax benefit provide little motive to purchase. Modifying the MID as proposed will adversely effect people buying entry level homes in California much more noticeably than individuals buying more expensive homes.

My other gripe is with the term 'Tax Reform.' Congress is turning this into a big mess. The problem is that tax reform is too generic. All involved are focusing on their specific definitions and benefits rather than congress stating specific goals; like rate cuts, rate hikes, simplification, pay down national debt, or just redistribution of wealth. I wish politicians that are pushing this agenda would provide a clearer vision. Until then, the taxpayer is just going to feel screwed.

With all of this uncertainty, houses are still selling. If you've read my previous articles, you already know that I see this as an opportunity. We will get through these uncertain times. We do not know what is going to happen, but now (rather than later) is the best time to invest in real estate.

With that said, this week's caravan, November 14, 2017, had two homes that stood out to me. One just came on the market and the other, I'm surprised, is still on the market.

The new listing is at 402 Odense Street in Buellton. This 3 bed/2 bath home in Thumbelina Village is listed at $595,000. This 1,800 square foot home has a pool, solar panels, and it's just been remodeled. This house has much to offer for under $600,000.

The other home is 2826 Baseline Avenue in Santa Ynez. It's a wonderful country farmhouse ranch on just under 5 acres listed at $1,750,000. The home is a 2 bed/2 bath charmer with an office over the 2 car garage, and a manager's house on the other side of the property, separated by 4 paddocks, a 12 stall barn, and pastures. If you're looking for the Santa Ynez ranch life, this is looking good.

If you would like to get a free market analysis of what your home is worth or if you would like to see any of these homes, please contact me. It would be my pleasure.

For more information please visit us at Central Coast Landmark Properties.

Rodney Smeester
Realtor ®
BRE # 01925202

Ph: 805 453 6000

More on the Proposed Tax Reform and California Real Estate

Real property owners in California should be concerned about the current proposed tax reform. The federal government is quietly taking away our previously sacred mortgage interest deduction, taking away state tax deductions, medical expense deductions, and limiting the property tax deduction to $10,000. An argument might be that the mortgage interest deduction is still there except that it is limited to interest on a mortgage up to $500,000. Let's think about that. The standard deduction is going to be raised to $24,000. What's the interest on a $500,000 loan at 4%? It's $20,000. That's less than the standard deduction. It would be better to take the standard deduction. It seems we are losing the other deductions like the state tax deduction. Even if we deduct property taxes, the advantage seems to be so small that it could be a push due to the increased cost of doing an itemized a tax return. With this tax reform, having a mortgage on your primary residence doesn't generate any tax advantages.

Are we screwed? I think that smart finance people will find ways to minimize their taxes. If this tax reform comes to fruition, the demand and prices for single family home sales might decrease a few percent. This isn't necessarily doom and gloom for the real estate industry. Even if the incentive to buy disappears, people will still need homes to live in. If that demand increases, based on simple economics, then the price for rentals will increase. Mortgage interest on rentals will still be deductible as an expense towards rental income. The savvy real estate investor should see this period of change as a great opportunity.

Another option, as a corporate business owner, is to own the residence within the corporation and rent it back to yourself. The corporation claims it as a rental and deducts the mortgage interest accordingly. If I can dream up these scenarios in a day or two, I have confidence that investors will find ways to optimize their tax liability. Taxes and the real estate market may be going through a near term change, but don't look at it as a problem. It is an opportunity.

Rodney Smeester
Realtor ®
BRE # 01925202

Ph: 805 453 6000



...Caravan, Santa Ynez, November 7, 2017: Several homes impressed me this week.

1415 Ribe Road is located in Solvang on 10 acres. This 4 bedroom/ 3 bath house has tremendous views. For those of us who desire horse facilities, there is a separate entrance to the four stall barn and assorted horse facilities. It's listed at $1,999,000.

3322 Manzana Street in Santa Ynez is a cute 4 bedroom/ 4 bath charmer located on a secluded cul-de-sac. It's listed at $619,000. It won't last long at this price.

1148 Oak Glen in Santa Ynez is the last home that stands out this week. It's located in the desirable Skyline Park water district. It's a 4 bedroom/ 3/12 bath home on .9 acres. It's listed at $1,895,000.


If you would like to get a free market analysis of what your home is worth or if you would like to see any of these homes, please contact me. It would be my pleasure.

For more information please visit us at Central Coast Landmark Properties.