Wednesday, December 20, 2017

Our Christmas Gift: The Final Tax Reform Package

Is the new tax package congress' Christmas gift to us? Compared to what it could have been, I would say yes. Two items of major concern did not make it unscathed through the reconciliation process in congress. The mortgage interest deduction was proposed to be limited from the current limits of $1.1M to $500k. The compromise only limited the deduction to interest on mortgages up to $750k with existing mortgages as of December 15th being limited to interest on $1M. The other item that did not make it to the final bill was the time period on the capital gains exclusion of up to $500k for married couples and $250k for single filers. The proposed legislation was going to change the requirement of the home being a primary residence to five out of the previous eight years. This change was dropped. The vesting period for the capital gains exclusion on a primary residence is staying at two out of the last five years. California home owners should breathe a sigh of relief. The two important changes with respect to real estate were not as drastic as initially proposed.

The mortgage interest deduction ended up not changing much. The new $750k limit is high enough for most California entry level home buyers to take advantage of the deduction. With regard to the capital gains tax exclusion on the sale of the primary residence, not increasing the vesting requirements is important to all people that are mobile. Millennials had the most to lose if this tax break had changed as proposed. They are the most mobile. Twenty and thirty somethings tend to go where the job opportunities take them. It will be easier to take their gains and move into another home within a 2-5 year period. That ability to move and put all their gains towards another home would have been affected if that change had been passed.

Taxes and tax reform are complex issues. There is no way to make everybody happy. When it comes to taxes, why is anybody happy? Only two real estate related items out of this major tax reform are addressed here. Tax accountants can and will spend the rest of their lives discussing the details of the entire package. Even though the tax package is disliked by most people, the stock market appears to be reacting positively to it being passed. This should lead to a strong economy. A strong economy is all that is needed to strengthen the California real estate market. Let's get ready for a hot new year, but for now:



RodneySmeester
RealtorⓇ
BRE # 01925202
805 453 6000

The December 19th caravan in Santa Ynez Valley had three notable properties to preview. The first home is located at 1978 Honey Locust Court in Solvang. The home is a 3 bed, 2 bath, 2,200 s.f. home. It is listed at $699,000. The second property is in Santa Ynez at 778 North Refugio Road. It is a 3 bed, 2 bath, 1,963 s.f. home on .82 acres. The property has a pool, an artist's studio, and a 2 bedroom guest house. It is listed at $1,500,000.

The last property to mention on caravan is 3200 & 3201 Caballo Road in Santa Ynez. The 4,600 s.f. home has 5 bedrooms and 4.5 baths. The 20 acre property has tremendous views, a pool, and a second legal residence. It is listed at $3,290,000.

Please contact me if you have any questions, if you would like to see any homes, or if you would like to receive a free market analysis of your home.

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



Friday, December 15, 2017

Our Christmas Gift, Tax Reform

Since when is hurting us not as completely as they would like, a Christmas gift? Politicians dwell in an alternate reality. Taking my hard earned money and telling me they are doing me a favor because it is not as much as it could be, is difficult to swallow. All of us are still going to be paying taxes. Only the triggers that determine taxes due are changing. Some of us will be paying less and some of us will be paying more. Hopefully, most of us will be paying less. Who will truly benefit from this reform?

The government will benefit, of course! Some analysts believe the tax receipts will decrease because tax rates will decrease. That is if finance, taxes, and the economy were a zero sum game, then tax receipts would definitely decrease. Our economy is not a zero sum game. If there is more money available for taxpayers to spend, the economy will grow, increasing tax receipts. Judging on recent stock market and holiday sales performances, we appear to be starting a period of economic growth. The government will get their money from the subsequent increased tax receipts.

The general population will benefit from the robust economy. Some of us will benefit more than others. What should we do to get the best benefit from a growth period? Real estate is normally a good bet. Some are concerned with this since the government is limiting the tax incentive to purchase a home, the mortgage interest deduction. Looking a bit deeper into tax reform's effect on real estate provides a different scenario. People need a place to live even if they are not buying a home. Demand will not be changing. Just who owns them might be changing or better yet, why people are owning homes might be changing slightly.

Owning a home and paying a fixed mortgage for the next 30 years is estimated to be about one third the cost of renting, including inflation, for the next 30 years. This incentive alone should be enough to keep real estate going strong. If it is not, taxpayers will use our imaginations to make the best of the situation. The first time home buyer can still take advantage of the mortgage interest deduction by owning the home as a rental rather than their primary residence. The first time home buyer would be purchasing as an investment and be a landlord initially while being a tenant elsewhere. This possible solution might sound extreme, but when adding in depreciation on the rental, that might be the only way to get significant deductions beyond the standard deduction on individual tax returns. Taxpayers will be creative and use the tax code as efficiently as possible. We will find out eventually.

Even when limiting the mortgage interest deduction as a tax incentive, real estate will still be an attractive investment that provides financial benefits along with the stability of owning a home. It is still the solid investment real estate has always been. With the economic potential this current tax reform package offers, there is a great opportunity to benefit from owning real estate for the savvy investor. When the politicians speak of the tax reform package as a Christmas gift, they are speaking about the lower of taxes for some of us. Not all of us see that as a gift. The true gift for all of us is the boost to the economy and the opportunity booming economy creates.

The opportunity is now. If you are interested in buying or selling real estate or have any questions, contact me. I'd be glad to help.


RodneySmeester
RealtorⓇ
BRE # 01925202
805 453 6000

The December 12th caravan in Santa Ynez Valley had two properties to preview. The first home is located at 742 Hillside Drive in Solvang. The home is a 3 bed, 2.5 bath, 2,000 s.f. condominium with mountain views. A tennis court, pool, and spa are included in the association amenities. The home is listed at $550,000. The second property is in Solvang at 922 College Canyon Road. It is a 3 bed, 2 bath, 1,791 s.f. home on half an acre. The property is listed at $899,000.

One property that was not on caravan, but still available, is 1145 Arroyo Mesa Road in Solvang. It is a 62 acre property with a barn and an apartment in the Ballard Canyon AVA. It has a nice location to build an estate home with spectacular views and plenty of sloping hills for grapes. The property is listed at $2,395,000.

Please contact me if you have any questions, if you would like to see any homes, or if you would like to receive a free market analysis of your home.

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






Sunday, December 10, 2017

What Will the Tax Overhaul Mean to You?

Why does tax reform concern someone involved in a discussion on real estate? Taxes, the economy, and real estate are intertwined. I have been writing for weeks about how minimizing the mortgage interest deduction (MID) will hurt the real estate industry. If we only focus on this deduction, it is a big deal. Let's look at if from a larger perspective. The MID is only plays a minor role in real estate. The economy is truly the decisive factor. Taking away tax incentives such as the MID can influence real estate, but will not contradict, the overall economic trends.

Tax reform, is it taking away tax incentives? Or is it closing loop holes? The media and politicians are misleading us when this term is used. Tax loop holes are an unintended way around owing a tax. The mortgage interest deduction is an incentive for the purchase of real property. There is nothing unintended about the MID. It is in our tax code to provide an incentive to purchase real estate and become a homeowner. Our leaders and media must provide us with balanced information rather than skewing language for their own purpose. With tax reform limiting the benefit of the MID, the government is taking away a tax incentive. It is not closing a loop hole.

If we just focus on losing the benefit of the MID, we miss the big pictures. Losing this tax incentive is difficult for homeowners to accept after being able to use it for all of these years, but a strong economy will make this change irrelevant. This loss might lead to a very short term correction, on the order of a few months, but it is not enough to turn a strong economic market downward. Currently, the stock market is around 24,000 and the early holiday season sales numbers are up big. The economy appears to be taking off despite the currently proposed tax reform package. Even if we completely lose our MID, real estate will still appreciate during a period of economic growth. A robust economy will outweigh the disadvantage of a limited MID.

The media and the real estate industry have focused on this tax reform package limiting the benefit of the MID. In a heated economy, this loss will be of little consequence to real estate. One of the changes of concern that the media is paying little to no attention to is the change in the capital gains exclusion when selling the primary residence. The current exclusion for a married couple is $500k if the property has been a primary residence for two out of the last five years and $250k for single individuals. The current proposal increases the vesting period to five out of eight years. This does not seem like a major change especially when the average time period for living in a home has increased from seven to eleven years, but it might be in five years.

This change has more relevance when we break it down to demographics. The younger the group, the shorter they stay in one location. Millennials only average four years before moving on. This is a problem to people who are moving from job to job or getting transferred after three years. Under the current tax system, gains of up to $500k for married couples/$250k for singles are tax free. Under the newly proposed system, these families and individuals will be paying capital gains taxes on any appreciation if the time period is less than five years. The government will take away part of money that many use as the down payment for their next home.This change is likely to be a factor that slows down entry level home owners from selling and moving up three and four years from now because they will not be able to use all of their gains to buy upward. This might end up being insignificant, but it seems that it will be a factor that could effect the middle of the real estate market in five years.

This vesting change to the primary residence exclusion will not effect real estate or the economy before that time, if then. For now, our economy and real estate appear to be starting another period of growth. The current uncertainty many people have due to the currently proposed tax reform make this period the perfect time to be buying and selling real estate. Whether it is to sell in order to buy into a more desirable location or to buy as a first time home buyer, now is a great time to do it so that you are in front of the economic growth period.




RodneySmeester
RealtorⓇ
BRE # 01925202
805 453 6000

The December 5th caravan in Santa Ynez Valley had three notable properties to preview. The first home at 856 Adobe Creek Road in Solvang is an almost 3 acre property with 3 bed/2 baths and tremendous views. The home is listed at $1,675,000. The second notable property is in Solvang at 2698 Quail Valley Road. It is a 4 bed/3 bath home on 1.11 acres. The property is listed at $1,325,000. The final property, at 4145 Roblar Avenue in Santa Ynez, is a 26+ acre parcel with a 4 bed/3 bath 5,400 s.f. home. It is listed at $6,600,000. Other attributes include approximately 16.5 acres of Syrah grapes, a pool, and spectacular views facing south over the Santa Ynez Valley.

Please contact me if you have any questions, if would like to see any homes, or if you would like to receive a free market analysis of your home.

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