Tuesday, November 14, 2017

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

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