New 2018 Tax Law and How It Impacts the Bay Area Real Estate Market

As if there weren’t enough factors swirling around the Bay Area real estate market the new 2018 tax bill arrives.  Both real estate investors and regular homeowners have been nervous about how the new tax bill will affect them.

In addition, many potential home buyers remain nervous about how this tax bill will affect not only the local real estate market as a whole but what financial impact it would have on a new home purchase.

No doubt that most people will end up paying more taxes on their real estate but will the Bay Area real estate market collapse? Doubtful. The job market remains strong and Inventory continues to be in short supply. Will prices continue to escalate? Maybe, especially with single family homes being in short supply. Will the market level off? Probably, especially for condos. Many new construction condos will come on market in 2018 which will ease the inventory supply and bring stability to values.

To ease some of the questions and concerns involving real estate taxes for 2018 and beyond, I asked CPA extraordinaire David Kupferman to answer a few questions.

1- How will the new tax bill affect current homeowners here in the Bay Area?

AS LONG AS YOUR MORTGAGE IS BEFORE 12/15/17 THEN YOU’RE GRANDFATHERED IN WITH THE PRIOR $1-MILLION DEBT CAP FOR DEDUCTIBLE MORTGAGE INTEREST.  AFTER THAT YOU’RE STUCK WITH DEDUCTING LESS, INTEREST ON $750,000.  HOME EQUITY (NON-ACQUISITION) DEBT EARLIER WAS LIMITED TO $100,000 DEBT INTEREST DEDUCTIONS BUT NOW THEY’VE TOTALLY ZAPPED THAT, NO DEDUCTIONS ALLOWED.  SAY WHAT?  JUST KEEP PAYING OFF YOUR HOME EQUITY LOAN, KEEP THE BANK HAPPY BUT THE IRS WILL NOT LET YOU DEDUCT IT ANYMORE.

REGARDING REAL ESTATE TAXES, NOW THE MOST YOU CAN DEDUCT ON A HOME’S IS $10,000/YEAR.  THE STATE OF CALIFORNIA, AS PREDICTED, IS TRYING A TRICKY LEGAL END-RUN AROUND THIS NEW NASTY FEDERAL LIMITATION BUT THE TRUMP ADMINISTRATION WILL LIKELY TRY TO QUASH THAT AS PUNISHMENT FOR NOT GIVING TRUMP THE GREATEST ELECTORAL VICTORY IN THE WHOLE HISTORY OF THE UNITED STATES OF AMERICA.

NOTE:  THE ABOVE LIMITATIONS ARE FOR HOMEOWNERS!  IF YOU OWN RENTAL PROPERTIES (OR IF YOU’RE RENTING YOUR HOME PARTLY OUT VIA AIRBNB) THEN THE ABOVE LIMITATIONS DO NOT APPLY AT ALL, OR ONLY IN PART.

2- What does it mean for potential home buyers here in the Bay Area?

PLAN ON PAYING MORE IN TAXES BASICALLY.  YOU MIGHT NOT BE ABLE TO AFFORD AS MUCH OF A MORTGAGE OR MIGHT NEED A 25 INSTEAD OF 20 YEAR LOAN…. YOU MIGHT NOT QUALIFY FOR AS BIG A LOAN AS YOU COULD BEFORE. THIS IN THEORY COULD IMPAIR HOME VALUES HERE BUT, THEN AGAIN, THE LOCAL MARKET IS SO JUICED UP, THERE’S SO MUCH MONEY HERE, THAT HOME BUYERS IN MANY CASES WILL STILL AFFORD THE HOME EVEN THOUGH THEY MIGHT BE PAYING, FOR EXAMPLE, AN EXTRA $20-30,000 DUE TO TRUMP’S CHRISTMAS TAX ACT.

3- Is there a new tax strategy that buyers or investors here in the Bay Area that you would suggest?

THE STRATEGY FOR HOME BUYERS IS DIFFERENT THAN FOR RENTAL INVESTORS – RENTAL EXPENSES DIDN’T CHANGE MUCH – NO LIMITATIONS ON TAX AND MORTGAGE INTEREST DEDUCTIONS, IN FACT RENTAL DEPRECIATION IN CERTAIN CASES WAS SPED UP, TAX RATES WERE LOWERED.  BUT FOR INDIVIDUAL HOMEOWNERS (AKA CALIFORNIA VOTERS) THE NASTY NEW LIMITATIONS HIT HARD…. BUT AT LEAST ANY OLD MORTGAGE DEDUCTION IS LIKELY GRANDFATHERED IN.

ARGUABLY, LIVING IN SIN DOUBLES YOUR (TAX SAVINGS) PLEASURE:  A TAX APPROACH WHICH COUPLES MIGHT CONSIDER WOULD BE TO BE SINGLE (CANCEL THE WEDDING!!  CALL OFF THE ENGAGEMENT!!  CALL THE DIVORCE ATTORNEY!!) THEN BUY/OWN THE HOUSE TIC (EACH OWNING HALF…) –THEN COULD EACH ARGUABLY DEDUCT $750,000 OF MORTGAGE DEBT INTEREST AND $10,000 IN PROPERTY TAXES, ETC.

4- In the real estate world, is this tax bill something that we are all making too big a deal about and that we should just go on buying and selling as before?

NO, NOT REALLY.  PEOPLE HAVE TO BUDGET - THE IMPACT OF TRUMP’S CHRISTMAS TAX ACT ON YOUR BOTTOM LINE CASH FLOW MUST BE CONSIDERED.  THERE IS NO MAGIC WAND RULE OF THUMB WAY TO DETERMINE THIS – ONE MUST RUN THE CALCS – EVERYONE’S A BIT DIFFERENT.  FOR SOME FOLKS THERE’LL BE BIG IMPACT, FOR OTHERS NOT MUCH CHANGE (IE: THE LOSS OF CERTAIN DEDUCTIONS MIGHT BE OFFSET BY A LOWER TAX RATE, MAYBE…).  BAY AREA HOME PRICES ARE INFLATED, WE LIVE IN A SECLUDED BUBBLE THUS, IN A WAY, IF THE TAX ACT LETS OFF STEAM ON OUR LOCAL HYPER-INFLATED HOUSING MARKET THEN IT’S BETTER FOR FAMILIES AND YOUNG COUPLES LOOKING TO BUY.  SO, WHILE MANY OF US MIGHT BE BITTER ABOUT TRUMP’S ATTACK ON THE CALIFORNIA LET’S AT LEAST TRY TO SEE THE SUNNY SIDE OF THINGS…

5- Is there anything in the future sense of the bill that would be of concern (or joy) to current or future property owners?

GIVEN THAT THE TAX ACT WAS WRITTEN IN A SECRET MAD PRE-CHRISTMAS RUSH (WITH LITTLE PUBLIC & EXPERT INPUT)  WE EXPECT FOR THE NEXT YEAR OR SO AN ONGOING STREAM OF LITIGATION AND CORRECTIONS/EDITS TO THE ACT.  THUS I’D SUGGEST YOU HOLD OFF SPENDING BIG LEGAL FEES ON NEW CONTORTEDLY STRUCTURED ENTITIES TO AVAIL OF THE ACT’S MANY FLAWS AND LOOPHOLES.  SO, TAKE ‘ER EASY, LET THE DUST SETTLE IS MY SUGGESTION.  ALSO, THE CONGRESS (IN THEIR BENIGHTED DESIRE TO SPREAD MARITAL HARMONY THROUGHOUT THE LAND TO STOP PEOPLE FROM THE SIN OF DIVORCE) MADE FUTURE DIVORCES FAR MORE PAINFUL.  HUH?  FOR DIVORCE SETTLEMENTS 2019-ONWARDS, TAX DEDUCTIONS OF ALIMONY PAYMENTS ARE BANNED, THUS THAT ALIMONY MONEY WILL BE TAXED AT THE HIGHEST RATES (USUALLY THE EX HUSBAND’S) INSTEAD OF THE RECEIVING SPOUSE’S LOWER TAX RATE – THEREFORE (VIA THE HIGHER TAX RATE) THE GOVERNMENT TAKES FAR MORE IN TAXES, THE ALIMONY RECIPIENT GETS FAR LESS.

LASTLY, IF THE DEMOCRATS RETAKE THE SENATE AND CONGRESS IN 2018 THEN MUCH OF THE ACT’S “TRICKLE DOWN” ASPECTS (AND HOW  IT WAS PARTLY FUNDED ON THE BACKS OF CALIFORNIA HOMEOWNERS) MIGHT REVERT TO HOW IT WAS WAY BACK IN 2017-EARLIER…

BUT DON’T HOLD YOUR BREATH – WE’VE GOTTA DEAL WITH IT THE WAY IT IS NOW…

Note: Keith Rockmael is not a tax expert. I can be reached by email at keith@resourcerock.com