It’s not news (fake or otherwise) that politicians and pundits on both sides of the aisle muddy the facts of an issue to make their own argument stronger. This happens every day in civilian life too. In my real estate career, I’ve consistently had to read between the lines on contract terms and see beyond the literal window dressing to serve my client’s interests.
And so, I read with interest an article by a real estate commentator doing his best Chicken Little impersonation with respect to the GOP’s tax reform. Now, this post isn’t meant to take a political position, nor is it intended in any way to sway your opinion on tax reform. It is, however, an attempt to extract reality from bluster, at least with respect to the real estate market in San Diego.
In the article, the author outlines “5 reasons why Trump’s tax reform is bad for real estate.” While some of what he says is true, my purpose here is to point out that the sky is not in immediate danger of falling over this proposed bill. Here’s my take on reality:
Reason 1: “The bill reduces the value of the mortgage interest deduction — but for new buyers only!”
Sharon’s Reality Check: While true if you are buying a home, you still get to write off the interest for the first $500k, which could be up to $20,000 per year. For those with mortgages above $500k, the difference is around $4000 per $100,000 above $500,000 (with a 4% APR). For example, if your loan amount is $500,000 with an APR of 4%, you’ll pay about $20,000 in interest annually – all deductible under the new proposal. But, say your loan is $600,000 with the same APR, that equals $24,000 in annual interest – above the $20,000 deductibility limit, meaning you will not receive a deduction on $4,000 of the interest you paid ($24,000 – $20,000 = $4,000).
Reason 2: “The bill requires people to stay in their homes longer to get the capital gains exemption.”
Sharon’s Reality Check: The proposed bill changes the exemption from 2 of the last 5 years to 5 out of the last eight years. Statistics clearly show most people stay in their homes for more than 5 years. In fact, according to a study by the National Association of Realtors, the average homeowner lives in their home for 9 years. So, the reality is this change will not affect most people. And, for those that is does, most properties don’t gain that much value in such a short period. This is more of a nuisance than a real issue for the general population.
Reason 3: “The bill makes homes with high property taxes much less attractive.”
Sharon’s Reality Check: While there are certain areas of the country where this change could definitely be an issue, in San Diego County, the median house price is $535,000. Property taxes are calculated at 1.2% of the sales price, so a $535,000 home will cost approximately $6420 in property taxes. The proposed bill puts a $10,000 cap on property tax deductibility, so, even a $900,000 home, with property taxes of $10,800, will be able to write off almost all it.
Reason 4: “The bill eliminates the deduction for moving expenses.”
Sharon’s Reality Check: This proposed change will only affect a small number of people, primarily those who relocate and have high moving expenses.
Reason 5: “The bill makes second homes and vacation homes much more expensive.”
Sharon’s Reality Check: I’ll say again, this affects the very small number of people who are looking to own second homes. If you are in the market for a vacation home, the bank isn’t looking at your tax write-offs, they’re looking at your debt to income ratio and whether you can make the payment, not what your effective payment will be after you do your taxes. If you don’t earn enough money to make the full payment, you won’t be getting the loan, period.
Although, this new tax bill is going to affect many people in some way, the general population is not going to see a huge impact on themselves personally. Yes, many people may end up paying more, but it’s not as bad as it seems. Sorry Chicken Little, skies are still going to be blue in San Diego.