How will Glendale Ca homeowners be impacted if the proposed tax overhaul bills become law?
The tax reform bill is now passed into law. Here are some key points from the National Association of Realtors:
• Capital gains exclusion. In a huge win for current and prospective homeowners, current law is left in place on the capital gains exclusion of $250,000 for an individual and $500,000 for married couples on the sale of a home. Also left in place was the requirement of tenure- a homeowner must claim the home as the principal residence for 2 out of the last 5 years. Both the House and the Senate had sought to make it much harder to qualify for the exclusion.
• Mortgage interest deduction. The maximum mortgage amount for households deducting their mortgage interest has been decreased to $750,000 from the current $1 million limit. The House bill sought a reduction to $500,000.
• State and local tax deductions. Both property taxes and state and local income taxes remain deductible, although with a combined limit of $10,000. Both the House and Senate bills sought to eliminate the state and local income tax deduction altogether.
Late in the day, December 15th Congress released their final compromise tax reform bill. The limit for the mortgage interest deduction (MID) will be reduced from the current $1 million to $750,000 on mortgages for a first or second home and the deduction of state and local tax deductions, including property, sales, and income tax, are capped at $10,000.
The final Congressional “Tax Reform” bill will be voted on early next week by both Houses of Congress.
The following is from an interview given by Lawrence Yun, chief economist for the National Association of Realtors, who said the following:
Both chambers of Congress have passed tax overhaul bills. There are still opportunities to make the final legislation better for homeowners. Let’s examine three key areas:
- There is a difference between the House and Senate versions on the maximum mortgage amount that can be deducted. The House bill limits the mortgage interest deduction up to $500,000 while the Senate bill retains at the current $1,000,000 in mortgage interest deduction. Currently most homes are priced under $500,000. Even the homes priced above that amount do not necessarily have mortgage interest exceeding $500,000. Nevertheless, there are some states that have substantially high-priced homes. In Hawaii, 63% of homes with mortgages are priced above $500,000. By contrast, there were only 13% of homes with mortgages in Hawaii that exceeded the $1 million threshold. One can clearly note the dramatic change in the number of people who will by affected by the new tax code under $500,000 compared to the $1 million mortgage limit. The similar figures are 49% and 14% in California for homes with mortgages priced above $500,000 and above $1 million, respectively. In Massachusetts, they are 28% and 5%; New York has 27% and 7%; New Jersey has 23% and 3%; Washington has 23% and 4%; Virginia has 21% and 3%, while Maryland has 20% and 3%.
- The House bill limits property tax deductions at $10,000 while the Senate bill initially proposed to allow no property tax deduction. Fortunately, in the end the Senate bill was amended and keeps the property tax deduction at $10,000. Had the Senate kept the bill as originally introduced with no allowance for property tax deduction, then the impact would have reached a wide array of homeowners. Given that 97% to 98% of all homeowners pay some property tax in most states, a good portion may have been subject to additional tax, particularly those itemize deductions rather than take the standard deductions. Those with large mortgages and who give plenty to charities would have felt the financial pain of not being able to deduct property tax. At a $10,000 limit, the pool of homeowners shrinks to less than 3% in most states. However, there are still a few states where a decent number of homeowners who exceed the $10,000 property tax limit will be affected. Namely, 6% of homeowners in Texas are above the limit. It is 8% in the District of Columbia, Massachusetts, and New Hampshire. In California, 9% of homeowners paid more than $10,000 in property tax, followed by 10% for Illinois homeowners. The states with the highest number of homeowners above the limit are Connecticut (13% of homeowners), New York (19%) and New Jersey (30%).
- An impact that is harder to assess is the requirement to live in a home for 5 years (down from 8 years) in order to qualify for the capital gains exclusion taxes. An NAR survey of recent home sellers reports that about one-quarter of all sales are within 5 years from the purchase date. Rather than behave the same as before with the quarter of home sales facing capital gains tax, the likely outcome is to keep homeowners staying put for at least 5 years in order to avoid this tax. That means, the federal government will collect a very small amount of tax revenue while causing big headaches for homeowners who want to advance in their lives and move when they desire. The states with the highest number of homeowners who have recently moved are as follow: Arizona, Colorado, Idaho, and Nevada with 31% of homeowners living in their current home for less than 5 years. Utah and Wyoming were at 29% and Florida, South Dakota, and North Dakota at 28%.
If you are unclear about what moves, if any, you should make in the near future, or wondering how this will impact your financial position long-term, contact us.