To illustrate how the changes to the standard deduction, repeal of personal exemptions, mortgage interest and state and local taxes might affect a first-time homebuyer, consider the example of Barbara Buyer. Barbara, an accountant making $91,580 per year, is single and currently rents an apartment. She also pays state income tax of $5,086 and makes charitable contributions of$2,088, but the total of these is lower than the standard deduction, so she claims the standard deduction.

Barbara’s tax liability for 2018 under the prior law is as follows:

Under the new law, Barbara would get a tax cut, computed as follows:

Tax Difference Under New Law.
Even though Barbara would not get the benefit of the personal exemption under the new law, her higher standard deduction would more than make up for the loss. In addition, the lower tax rates of the new law would help deliver the total tax cut of $2,632 ($15,619 – $12,988) as compared with the prior law.

However, let’s take a look at what happens to Barbara if she were to purchase a condo costing $440,000 (median price for a condo in California). She takes out a 30-year fixed rate mortgage at 4.5% interest, putting down 20%. Assuming she buys early in 2018, her first-year mortgage interest would total $15,372 and she would pay real property taxes of $5,500.

As a first-time homeowner, her tax liability under the prior law would be computed as follows:

Note: Under the prior law, Barbara would lower her tax liability for 2018 by $4,783 ($15,619 – $10,837) by purchasing the condo. This is the financial effect of the prior law’s tax benefits of buying a home. This amount effectively lowers her monthly mortgage payment by $399 per month

Now, let’s take a look at what her tax situation would be under the new law as a first-time homebuyer:

Tax Difference Under New Law. Even though Barbara would still be able to claim all of her itemized deductions under the new law, she would lose the benefit of her personal exemption. However, her taxes would actually go down under the new law by $623 ($10,837 – $10,213) as the lower tax rate would more than make up for the loss.

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Here’s what first-time buyers need to know about the Tax Cuts and Jobs Act that was signed into law December 2017.

MORTGAGE INTEREST DEDUCTION

• The new limit on deductible mortgage debt is $750,000, down from the previous $1 million. There are certain situations which may allow a home purchase to qualify for the $1 million, even if the home closes after Jan. 1, 2018. Talk to a tax professional to learn more.
• Interest paid on home equity loans is only deductible if the proceeds are used to substantially improve the residence.
• Interest remains deductible on second homes, but is subject to the $1 million/$750,000 limits.

DEDUCTION FOR STATE AND LOCAL TAXES (SALT)

• Homeowners who itemize their tax returns can claim up to $10,000 total for state and local property taxes and income or sales taxes. This $10,000 limit applies for both single and married filers and is not indexed for inflation.

HOUSING MARKET IMPACT

• Homes priced $500,000 and below will only be slightly impacted.
• C.A.R. estimates that 60 percent of first-time buyers will purchase a property priced below $500,000, and 80 percent will purchase a home priced below $750,000, so most first-time buyers will not feel the effect that tax reform exerts on home prices.
• The supply of available homes for sale also will be slightly impacted, as homeowners delay trading up/down to their next home. Overall, the California housing market is expected to see a decline of 0.3 percent in active listings in 2018 due to tax reform.

MOVING EXPENSES

• Only members of the Armed Forces may deduct moving expenses.

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Here’s what home sellers need to know about the Tax Cuts and Jobs Act that was signed into law December 2017.

Home Price Impact

• California’s median home price is projected to increase 3.2 percent in 2018, which is good news for home sellers.
• Properties priced below $500,000 may see an approximate 4 percent increase in price.
• Properties valued at $750,000 may see a price increase of 2.4 percent, while properties at the higher end could inch up 1.5 percent.
• Properties priced between $1 million and $1.5 million could still see some appreciation overall, but will likely be at a growth rate of less than 1.5 percent.

Home Sales Impact

• Taking into account the impact of tax reform, home sales in California are expected to increase 0.3 percent in 2018.
• Demand for homes priced $600,000 and below will remain strong, due to limited housing inventory.
• Homes priced $750,000 – $1 million could experience a decline in sales of up to 0.9 percent.

Housing Supply Impact

• The supply of available homes for sale also will be slightly impacted, as homeowners may delay trading up/down to their next home.
• Overall, the California housing market is expected to see a decline of 0.3 percent in active listings in 2018

Download the Info Sheet Here

Here’s what homeowners need to know about the Tax Cuts and Jobs Act that was signed into law December 2017.

Mortgage Interest Deduction

• The limit on deductible mortgage debt was reduced from $1 million to $750,000 for new loans taken out after 12/14/17. Current loans of up to $1 million are grandfathered and are not subject to the new $750,000 cap.
• Homeowners may refinance mortgage debts existing on 12/14/17 up to $1 million and still deduct the interest, so long as the new loan does not exceed the amount of the mortgage being refinanced.
• Interest paid on home equity loans is only deductible if the proceeds are used to substantially improve the residence.
• Interest remains deductible on second homes, but subject to the $1 million / $750,000 limits.

Deduction for State and Local taxes (SALT)

• If you itemize your tax return, you can claim up to $10,000 total for state and local property taxes and income or sales taxes. This $10,000 limit applies for both single and married filers.
• If you prepaid your 2018 state and local income taxes in 2017, you cannot deduct those taxes

Capital Gains Exclusion

• Remains unchanged at $250,000 for single filers and $500,000 for joint returns if the house was lived in for two of the last five years.

Housing market Impact

• California’s median home price is projected to increase 3.2 percent in 2018. Overall, home sales in California are expected to grow in 2018.
• The supply of available homes for sale will be slightly impacted, as homeowners may delay trading up/down to their next home.
• Overall, the California housing market is expected to see a decline of 0.3 percent in active listings in 2018.

Download the Info Sheet Here