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    How Rough is the GOP TAX Plan for Los Angeles Homeowners

    Tax Plan Real Estate Los Angeles Hollywood

    Just how rough is the GOP tax Plan for Los Angeles Homeowners? The Senate just passed its version of the widely unpopular tax reform bill and now the hashtag #TAXBILLSCAM is trending on Twitter.  Some of the changes coming in the GOP bill will have dramatic effects on Los Angeles real estate.  So just how much with huge tax cuts end up costing you?

    By David Rae Certified Financial Planner™, Accredited Investment Fiduciary™

    To put this in perspective, in 2014, Californians claimed $101 billion dollars in state and local deductions.  This is according to the nonpartisan Tax Foundation.  As you can see, the elimination of these deductions will dramatically affect a lot of hardworking people here in the Golden State.

    Whether you own a home or hope to in the future, this GOP tax plan will make this part of the American Dream even harder to achieve for many Californians.  Reducing the tax incentives for home ownership may cause the value of homes to drop anywhere between 10-and-15-percent according to some experts.  This may seem like good news for those of you who are struggling to get into the housing market.  On the other hand, this will ultimately make the actual after-tax cost of ownership out of reach for more people in Los Angeles, Southern California and beyond.

    Mortgage Deduction Slashed

    To many Americans, this many not seem like a big deal.  But the GOP house bill slashes the Mortgage Deduction from $1,000,000 to just $500,000.  It also eliminates the deduction for home equity lines of credit up to $100,000.  The Senate on the other hand keeps the $1 million dollar mortgage cap, but also eliminates the Home Equity Line of Credit interest deduction.

    If you’ve tried to shop for a home lately, you will know a million dollars in Los Angeles is not some huge mansion.  This is likely a track home, with good bones, and in need of a little TLC.

    So just how much could slashing the mortgage deduction cost you?  Losing $500,000 on your mortgage deduction, at say a 4% interest rate, would mean your taxable income would increase around $20,000.  Assuming a 28% federal bracket, this could easily cost you $5,600 per year!  And that’s just for the mortgage deduction.  It will be even more if you also have a home equity line of credit.

    The only Rae of Sunshine is that this appears to only affect “new purchases” (this includes refinances as well).  For current homeowners with mortgages of $500,000 or more, you may be able to continue claiming your mortgage deductions up to $1,000,000.  In the end, if this language makes it on the final bill, it will be a relief for those with mortgages larger than $500,000. At least until you need to move or refinance.

    Property Taxes Deduction Limited

    Originally, the Senate wanted to completely eliminate the Property Tax Deduction.  Now, it looks like you will still be able to deduct the first $10,000 of your property taxes.  This roughly translates into an $800,000 home.  This won’t affect everyone who owns a home in California but I know around West Hollywood, where I live, the land under my house is worth at least twice that amount.  As you can see, many people could end up paying more in property taxes as a result of the proposed deduction cap of $10,000.

    Luckily, Californians benefit from Prop 13 which is like rent control for your property tax bill.  This limits how much your taxable home value can go up each year at 2%.  As a result, people who have been in their homes for long periods of time will lose less from this tax hike.  This means new homeowners, who are likely more sensitive to tax increases, will feel the brunt of this change.

    State and Local Taxes No Longer Deductible

    California income tax rates go as high as 13.3%.  With the proposed tax plan, you will no longer be able to deduct the taxes you pay to California on your federal income taxes.  You might ask what the heck does this have to do with real estate in Los Angeles or California for that matter?  It matters because only a small portion of the workers in California can afford the median home prices in their area.  Higher taxes will drive this number down even further.  Increased taxes will literally translate into less money that people will have to save for the down payment or to pay their mortgages.  This could result in an increase in supply and a decrease in demand – less people looking to buy could drive down prices.  Losing this tax deduction would also raise the net cost of ownership, which would also add to downward pressure on home prices in much of the Greater Los Angeles Area.

    Harder to Sell Your Home Tax Free

    As it stands now, if you lived in your home for two of the last five years and sell it, you can potentially pay no capital gains taxes.  The exemption is $250,000 in profit for singles and $500,000 for married couples.  These are big numbers but not as hard to hit if you live in Hancock Park compared to a city or town in say Kansas.  Please know that I’m not bagging on Kansas.  I’m just pointing out that the median home price there is $127,700 according to Zillow. That is barely a down payment on a condo in much of LA.

    The new plan would require you to have lived in your home for five of the last eight years.  You would also only be allowed to take the exemption one time each five year.  Currently, you can do it every two years.  Additionally, the new plan would phase out the exemption for people earning more than $250,000 per year and $500,000 for married couples.

    This will cost many people more when they have to sell their homes because due to a job loss, divorce or transfer.  It may also cause people to stay put longer in their home, and not move up to bigger homes as their incomes increase.  This could potentially make it tougher for younger and first time home buyers.

    Picture it.  You get a great job offer across the country and your house has appreciated $500,000.  If you’ve lived there for two years you would owe ZERO taxes under current tax law.  Next year, under the same circumstances, you would owe $75,000 in capital gains.   LET ME REPEAT.  YOU COULD OWE $75,000 more from just this one little change.

    Second Homes Get More Expensive

    Let’s say you have a cabin in Big Bear or vacation home in Palm Springs.  You would no longer be able to deduct any of the mortgage interest on your second home.  Currently, you can deduct up to the $1,000,000 mortgage limits, mentioned above, across your various houses.

    I can hear the critics saying, “Poor rich people have to pay more for the vacation homes.”  Fair enough. This will be especially hard for those of us in Los Angeles where prices are high.  But it is much easier to own second home in other parts of the country.  For example, a lake house is much easier to buy when you are looking at a $50,000 mortgage compared to spending $500,000 for an okay place in Palm Springs.  They would lose the deduction as well.  Just saying.

    This change could lead many people to rethink the mortgages they have on their various properties.  It could also cause them to sell.

    Will Tax Plan cause Los Angeles Real Estate Prices Rise or Fall?

    As a fiduciary financial planner I know many people buy a house based on what they can afford in terms of payment and taxes.  If you raise those costs, they won’t be able to pay as much for their home in terms of purchase price.  I don’t have a crystal ball but this can’t help prices go up.  Only time will tell as to whether or not they will drop the 10-15%, like many experts are predicting. If you can still afford your home without the tax full tax deduction keep calm and carry on.   Rushing to sell likely won’t be a smart move for most people.

    What to do Now to Minimize your Tax Shock

    Be proactive but don’t freak out.  Your taxes may be going up and adjustments to your financial plan will likely need to made.  Wait until the ink is dry and don’t rush out and make emotional financial decisions.  If current homeowners are allowed to keep their larger mortgage deductions, think long and hard before refinancing.  Make sure you take into account the after-tax cost.  As we come up on year-end, GOP tax plan or not, it is a great time to sit down with a Fiduciary Financial Planner to make sure you are minimizing your taxes and staying on track for your financial goals.  You might as well maximize your hard work.

    For tips to minimize your tax bill before year end Give this a read:  How to Lower Your Tax Bill Before 2018 and the GOP Tax Plan


    Live for Today, Plan for Tomorrow.

    DAVID RAE, CFP®, AIF® is a Los Angeles retirement planning specialist with DRM Wealth Management.  He has been helping friends of the LGBT community reach their financial goals for over a decade. Nightline has called him a “Tax Wizard in an Expensive Suit”  He is a regular contributor to the Advocate Magazine, Investopedia and Huffington Post as well as the author of the Financial Planner Los Angeles Blog.  Follow him on Facebook or via his website www.davidraefp.com

    Financial Expert David Rae discussing GOP Tax Plan - Los Angeles Real Estate
    Financial Expert David Rae discussing GOP Tax Plan – Los Angeles Real Estate ABC 7 News

    Disclaimer: The Senate and House have each passed their own version of the GOP Tax Plan and some details will likely change before final implementation. 12/5/2017 “Tax Plan Los Angeles Real Estate”





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