Tax Reform Law Bay Area Update Mortage Interest Deduction MID

Dated: 01/11/2018

Views: 3296

Image titleThe first significant reform of the U.S. tax code since 1986 has finally passed and changes have been made to both individual and corporate tax rates. As a real estate professional I am often asked about impact on real estate. The impact of these changes on Bay Area real estate is going to have an immediate impact on income taxes for buyers and existing owners of homes exceeding the median price for the Bay Area. In summary, this means that the average buyer will have no impact as it relates to new caps on Mortgage Interest Deduction or MID. 

Prior to the tax change homeowners could deduct interest on a mortgage up to $1M against their personal income taxes. That limit has been reduced and the cap is now $750,000. Meaning any interest paid on a Mortage above that amount is no longer deductible but below that amount the deduction remains intact.
Simply  put if you were to purchase a home for $935,000 and took a loan for 80% of the purchase price then you would be sitting right under the cap as follows:
Purchase Price $935,000
20% down: $187,000
Loan Amount: $748,000 (Interest on this loan is deductible)
Essentially the new tax law as it relates to MID has zero impact.
To get the benefit of the maximum deductibility it would be prudent to construct your loan to make sure you get as close to this cap as possible. Now that home equity loan interest is no longer deductible, the strategy of pulling an HELOC down the line with the same benefit no longer applies.
How will this impact the Bay Area prices and real estate overall? I expect minimum impact in the Bay Area housing market with this particular change in tax code. Many buyers purchasing over this limit will just incrementally lose the additional MID. $250,000 at 4% interest is $10K per year and with income taxes of 39% this equates to approximately loss of a $4K but this buyer would still have an approximate deduction of $11,700. Median sales price in the Bay Area as of Dec 2017 is $787,000 well under the purchase max phase out of $935,000 based on a 20% down payment.
Some people have asked about the higher end of the market being impacted. My response to that question is that the higher end of the market fluxuates with demand based on several other factors but interest deduction and the loss of a $4K credit is not going to impede a purchase of a $2M home. Those buyers are often paying cash or will put the proper amount down to hit the $750,000 loan amount perfect. So essentially that buyer for a $2M property puts down $1,250,000 or even pays cash which is common in the Bay Area Luxury Market.
Below is a chart for Bay Area Real Estate from California Association of Realtors (CAR). These are all talking points you should discuss with your CPA. Please note, I am not a tax professional or. I am a licensed real estate broker.
All information conveyed above should be discussed with your CPA to verify how this will impact you and your specific tax situation. Although the changes simplified taxes, specific deductions are based on income levels, job profession and other factors that are specific to each individual.
If you have questions about your plans to purchase a home in the Bay Area, please reach out to any of our real estate professionals. Enjoy the rest of your summer
Kevin & Naomi Kieffer, Broker Associate, Team Leaders for the EastBayPro Team of Keller Williams Realty
Our team received the quadruple platinum award agin this year for exceeding $70M in sales volume with over 105 successful transactions. We would be delighted to put our track record to work for you. Please call us anytime. You can click any of the links below to view active listings in any of the cities listed.You can call or text our team members at 925-304-6346 - Kevin R Kieffer, Broker Associate - Team Leader for Keller Williams Realty's EastBayPro Team
Our team members include Naomi T Kieffer, Matt Rubenstein, David P Johnson, Heather Gowdy, Scott Maher, Rochelle Maher, Taylor Pollard, Nina Kasper-White & Ken Wilson - Please call and "Let Us Exceed Your Expectations". Our team services the following key bay area cities:
Walnut Creek,Pleasant Hill, Martinez, Alamo, Lafayette, San Ramon, Danville, Orinda, Moraga, Concord,Brentwood, Oakland, Fremont, Pleasanton, Dublin, Livermore, Hayward & Castro Valley

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1 comments in this topic

  • Posted by Gloria Cowart
    I like this home

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