President Trump promised tax reform during his campaign. To deliver on that promise his administration released a “first draft” of a tax-cut plan. It was a one page outline that highlighted overall goals, plus reforms to both individual and business taxation.
It details individual tax relief in the form of a reduced number of tax brackets from seven to three; 10%, 25% and 35%. There are also notable items that, in combination, may not be friendly to the real estate industry. The outline promises to double the standard deduction and to protect the home ownership and charitable gift tax deductions, which implies that other itemized deductions are subject to repeal such as state and local taxes and investment interest expense.
It is the combination of the increased standard deduction with elimination of the state and local tax deduction that may affect most homeowners. In high tax states, especially California, where homeowners typically deduct mortgage interest, property taxes and state income taxes, they often exceed the original standard deduction, even after they own their home for several years. It is the real estate and state income taxes that push them over the standard deduction. By eliminating the state and local tax deduction, average homeowners may not have mortgage interest exceed the standard deduction unless their mortgage loan balance is high. Once these drop below the proposed standard deduction of $25,200 for those filing married filing joint, there is no further benefit. This could eliminate the incentive for many to purchase homes. A renter may not be motivated to save for a down payment to purchase a home if ultimately they receive no tax incentive to do so. This could have a chilling effect on the housing market, particularly affecting those properties at the lower end of the price spectrum.
There is a real fear that these changes, though they simplify the tax filings for many taxpayers, would have a disproportionate downward pressure on those taxpayers Trump promised to help most. The residential real estate industry could be negatively affected overall.
Contact Pam Bustos at 714.569.1000 or [email protected].
Pam’s article in the Orange County Business Journal