Impact of TCJA

January 15, 2018

How TCJA Impacts California Real Estate

Let’s talk about you and me, let’s talk about tax, baby.

TCJA

All of us at Ivan Estrada Properties are getting a ton of questions about the tax bill known as the Tax Cuts and Jobs Act and how we think it will affect the housing market.  While complicated, we’d like to give a brief summary of general issues this bill causes specifically relating to real estate in California.  Specific questions about an individual’s tax situation should always be directed to a professional.

State and Local Tax (SALT) and Mortgage Interest Deductions:

The two most discussed provisions of the new tax bill are SALT and mortgage interest deductions.   The TCJA imposes a $10,000 combined cap on all SALT deductions whether they are for real property taxes, or state or local income taxes, or sales taxes, this applies to both single and married filers.

The mortgage interest deduction for existing mortgages of up to $1 million taken out before December 15, 2017, will not be affected. Homeowners may also refinance mortgage debts existing on December 14, 2017, up to $1 million and still deduct the interest, so long as the new loan does not exceed the amount of the mortgage being refinanced.

For any new loans, however, the cap for deduction will be $750,000.  Deduction of interest on loans secured by a second house will still be allowed subject to the $1 million and $750,000 caps.

How this applies to homeowners:

If you’ve purchased a home in the city of Los Angeles for $1 million, the average yearly property tax is 1.25% ($12,500/yr).  That means for SALT, one would have already surpassed the $10,000 cap for deductions.

Tax Rates, the Standard Deduction, and the personal and dependency exemptions

There will continue to be seven tax brackets, but the marginal tax rates in each bracket will be slightly lower. The standard deduction will be nearly doubled to $12,000 for individuals and $24,000 for joint filers.

But the personal exemptions for taxpayer(s) and dependents is repealed. Under prior law, tax filers could deduct $4,150 for the filer and his or her spouse, if any, and for each dependent, but they will no longer be able do so under TCJA.

Sale of Principal Residence – Exclusion of Gain

TCJA does not change the $250,000 for single filers and $500,000 for joint returns exclusions from capital gains tax for the sale of a principal residence when the homeowner has owned and lived in the home for two of the last five years.

Capital Gains

TCJA retains the current long-term capital gains rate of 15% generally but 20% on those in the highest tax bracket. Depreciation recapture for real property remains at 25%.

Like Kind Exchanges

Tax deferred IRC section 1031 like kind exchanges for real property will be retained in the TCJA. Personal property 1031 exchanges are no longer allowed.

Other Provisions

Moving expenses will no longer be deductible except for those in the military. Certain certified historic structures will still receive a tax credit. The child tax credit will be increased from $1,000 to $2,000. Casualty loses will be deductible only in a presidentially-declared disaster.

The Big Picture:

It will take a few years before experts will be able to accurately see how TCJA will affect our market, but what is clear is that for the first time in a century, the federal government has backed away from subsidizing homeownership as a pathway to the “American Dream.”

­Here’s a good rule of thumb: If you live in a city with high housing costs, your market will likely get more expensive. If you live in a city with moderate to low housing costs, you may not notice any difference at all.

150 EL CAMINO DRIVE, LOS ANGELES,CA. 310-595-3888 © 2017 DOUGLAS ELLIMAN REAL ESTATE. ALL MATERIAL PRESENTED HEREIN IS INTENDED FOR INFORMATION PURPOSES ONLY. WHILE, THIS INFORMATION IS BELIEVED TO BE CORRECT, IT IS REPRESENTED SUBJECT TO ERRORS, OMISSIONS, CHANGES OR WITHDRAWAL WITHOUT NOTICE. ALL PROPERTY INFORMATION, INCLUDING, BUT NOT LIMITED TO SQUARE FOOTAGE, ROOM COUNT, NUMBER OF BEDROOMS AND THE SCHOOL DISTRICT IN PROPERTY LISTINGS SHOULD BE VERIFIED BY YOUR OWN ATTORNEY, ARCHITECT OR ZONING EXPERT. EQUAL HOUSING OPPORTUNITY.

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