Trump’s New Tax Plan and Bay Area Real Estate

As I am sure most of you are aware, Trump’s new tax plan went to effect January 1st, 2018. Many of the questions that I receive are focused on how this new plan affects real estate in the area, and how it affects future the appreciation of real estate. 

As with any new tax reform, it can get very complicated very quickly. In this post, I want to outline the key changes for homeowners and people looking to enter the housing market. My goal is to make it as simple as possible to understand and provide you with some examples. I have oversimplified some numbers, but I think it is a good start to understanding how the tax reform will work.

  1. New Income Tax Brackets: 

    Your income tax will likely go down. I used the NY Times interactive tax calculator (best I have seen so far - NY Times Tax Calculator) for a married couple with 2 kids, filing jointly, living in California with a household income of $200k - $350k, you would be likely to save approximately $4,400 in tax.

    Net gain: +$4,400
  2. Mortgage Interest Tax Deduction: 

    Now falls from $1mil ($1.1mil if you include and equity line of credit) to $750k. For very simple numbers, let’s compare how much it would actually cost you on $1mil vs $750k worth of a loan in a year of your home ownership at 4% interest. Under the old tax system, you would pay $40k in interest on a $1mil loan which you could deduct from your taxable income. Now that number falls to $30k, because your loan interest deductibility is lower at $750k. Let’s say you earn between $165k - $315k of yearly household income – the additional $10k from the old tax system would come off the top of your income and falls into the 24% tax bracket. Your net cost under the new tax reform would be an estimated $2400 a year

    Net Loss: -$2,400
  3. Section 121 of the tax code remains the same. You can sell your home capital gains tax free up to $500k as long as you have lived there in the last 2 out of last 5 years. This is a huge plus as the original proposal was going to change it to 5 out of the last 8 years.
  4. State and Local Taxes (SALT) including property tax – A lot of people don’t know this, but previously you could deduct state and local tax that you pay on your federal return. This is a big one as 93% of California’s in the $200k - $300k household income range used the SALT deductions previously. On a $1.5mil house you could lose up to $18k (1.2% estimated property tax) in deductions. At the same 24% tax bracket (as used in the mortgage interest deduction example), that could end up being $5,760 extra dollars you would have to pay in taxes. However, California is working on SB227 which will allow you to make a charitable donation to the state of California that offset the amount of State Tax you would have to pay, rendering the SALT deduction in effect again. This has yet to pass, so for now, let’s say this is probably the biggest negative impact of the new tax reform. 

    Net Loss: -$5,760 on a $1.5mil house

So there it is, the key changes and some numbers that might bring to light what the difference could look like. I think it is too early to predict exactly how this will affect the real estate market in the Bay Area. However, if I had to make an educated guess, I would have to say very little. If you take the numbers I presented and look at how much extra it would cost to purchase and own a $1.5 mil house, it would be cost an additional $3,760 a year. Appreciation is greatly out stripping that number at well over double digit growth in most markets. Approximately $300 extra a month (in this example) is not going to cause people to shy away from purchasing homes. There may be a few cases where the additional expense takes a certain buyer away from the market because they no longer qualify for the loan they need, however, I think this will be a VERY small portion of the buyer pool. Additionally, these changes are suppose to reset and change back to the old tax system at the end of 2025 - which is a mere 8 years away. 

As for strength of market - 16,021 jobs were added to the Bay Area in November 2017 and 10,900 in December 2017 (typically a slow month for hiring) which is fueling the continued demand for housing. The economy continues to be strong with the NASDAQ growing 28% over the last year and Apple, Google and FB growing at even stronger numbers. The influx of jobs, strong economy and minimal additional cost/short time frame for this new Tax Reform, all point towards the status quo of the last 5 years of Bay Area Real Estate. I except continued housing demand and appreciation for the next few years, at least till the next election.

BlogKelly Kang