Q: I’ve heard that the new Federal Tax Reform is going to have a big impact on owning real estate. What does this mean for me? 

A: Federal Tax Reform has passed. Most of us, including realtors, lawyers, and tax professionals, have had insufficient time to truly digest the new plan and its practical implications.  It does appear that the implications are going to be pretty tough on a high priced real estate market like Los Angeles.

Here are the specifics that impact homeownership:

1) For new mortgages, the interest deduction has been reduced from a mortgage limit of $1 Million to $750,000;

2) Interest paid for home equity loans are no longer tax deductible, even on already existing loans;

3) Unlimited Federal tax deductions for state and local income taxes and for property taxes, are now capped at a maximum deduction of $10,000; and

4) Increased standard deductions will lessen the number of taxpayers who itemize.

Although less than 2% of homes nationwide are valued higher than $750,000, almost half of those are located in California, according to the National Low Income Housing Coalition.  If you are reading The Argonaut, you likely know that in our immediate neighborhoods, $750,000 is closer to the minimum purchase price for a condominium. Many condominium and home owners have high mortgages. The ability to deduct those mortgage interest payments from Federal Income taxes has been one of the top reasons people buy a new home. In fact, that was the intent of the deduction. Although the original interest deduction did not contemplate mortgages, later determinations to retain the deduction were based on the goal of promoting homeownership.  In 1984, President Ronald Reagan promised to “preserve the part of the American dream which the home mortgage interest deduction symbolizes”. There will now be far less encouragement of the American Dream. I guess the Reagan Era of the Republican party is officially dead.

Will it kill our property values, too? Not altogether, but there certainly will be an impact. Moody’s Analytics report projects that home prices will be down nationally by 4% by summer of 2019- not necessarily a decrease, but 4% less than they would have been without the tax changes. Based on the statistics on where the high-priced mortgages are concentrated, we can safely assume that California will bear a bigger decline than those markets not directly impacted by these changes.

These changes will mean more money out of pocket for homeownership. If you are a renter and are thinking “It’s about time those rich homeowners stopped getting tax cuts”, think again. It’s about to cost you more, too.  Less renters who are able to transition into becoming homeowners means less available rental units. Less availability and higher prices, if you can believe either can get worse in Los Angeles, here they come.  First time homeowners will be less likely to afford upgrading homes, staying in their “entry level” homes and condominiums longer, again creating high demand for those opportunities. The middle markets will likely suffer the most, with the opposite problem- less buyers and decreased prices. Worst of all, the rental market will be over-crowded with a populace that no longer sees the financial incentive to own instead of rent.

Sellers, it may be that you should hold for a while longer, or depending on your price point, it might benefit you to sell before the true impacts of this bill have hit your market. Buyers, you may be less excited, or you may find your opportunities in these changing times. Having trouble determining whether it is in your best interest to sell, buy, or rent? Contact me for a personalized analysis of your situation.

Disclaimer: This article is intended to be primarily for entertainment purposes, and is not to be considered legal advice.

ABOUT LISA PHILLIPS, ESQ / CA Bureau of Real Estate Lic# 01189413

Lisa Phillips is an active Realtor in the Los Angeles area, with more than twenty years as a practicing real estate broker and attorney. Her unparalleled knowledge of real estate, from local markets and pricing to legal issues and deal-making, has made her a trusted and valuable asset to her clients. In addition to her real estate and business savvy, Lisa is passionate about helping others, and works tirelessly to achieve the best results for her clients. For more information, please visit www.LisaPhillipsRealEstate.com