Thursday, January 11, 2018

I am not a CPA - nor am I CNN - these are my thoughts as a Broker in California on the new Tax Bill

The conclusions by CNN on this new tax bill need more analysis. Article here:

1. Most people are getting a lower tax rate - this means more money in people's paycheck  - including as of this first pay period. It may be small but it is an increase. Some larger earners are getting bigger increases felt already.  It is these larger earners who are most affected by the reduction on loan interest deductions to $750,000 from $1M.  But they are the ones who will feel the increase in net income the most. More net income yields more savings for down payments, which will offset the reduction in interest deductions.

2. There has long been a cap on loan interest deductions at $1M. Buyers of homes primarily over $1,250,000 have made decisions to buy those homes despite not being able to fully deduct the interest on their loans. ($1.25 range and up is based on $1M loan cap and an approximate 20% down payment)
     - Many buyers in that >$1.25M price point are trading up with equity.
     - Many buyers are paying in cash or with large down payments.
     - Consider the math: At 4% interest rate, the $250,000 difference is $10,000 of deduction, which at 30% tax bracket is $3,000 of net income or $250 per month. Many buyers are getting loans between 750-1M will get a blended hit - not as bad. And many buyers who are taking much higher loans $1.5M - $3M in many coastal areas will not feel the impact of $250 per month. And all of these buyers will be getting lower overall income tax rates.

3. A higher standard deduction will have less people itemize. OK - maybe true. But those affected by the lower caps on interest deductions and property tax caps absolutely will itemize. The standard deduction is not prevalent in the high cost coastal areas. If you are filling out a 1040EZ - I would suggest talking to a CPA or tax-preparer to see if you can save money by itemizing. The higher income earners definitely do!

4. Most high income or high net worth individuals buying $1.25M+ properties have made their ability to buy those homes through self-employment, investing in real estate or having good additional incomes. If they are high income employees - most have good guidance from CPA's to reduce tax liabilities. All of these high price point home buyers will weather the new tax guidelines well. Most will end up benefiting from lower income tax rates which will offset the deduction limits.

5. Have you seen an impact in the your 401k? Have you noticed what the stock market is doing? Corporate earnings will be up and corporate net incomes will be up. This will greatly impact high price point buyers over the rest.

6. One of the greatest financial grievances over the last couple years by higher income earners has been the cost of health insurance. Those additional hundreds of dollars per month allocated to health premiums - especially if you have employees - has dampened higher priced home sales. Those premiums going down with proposed plans may very well help the real estate markets.

7. There is a connection between the entry level $300,000 buyers in California, the mid range $500k-$800k buyers, and the & the $1M+  buyers. If this tax bill spurs the first time buyer, that will spur a trade up transaction into the mid range and that will impact the next tier. Not all transactions happen this way, but more lower priced transactions will impact the higher levels positively.

That's all for now. Let me know what you think. It will be interesting how this plays out.

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