President Trump in September 2017 released a tax plan that could bring major changes to the housing and mortgage industries, including in California. To understand how your home buying and/or refinancing could be affected in California, keep reading for the most up to date information.
Doubling of the Standard Deduction
One of the major changes that could affect Californians dramatically is that it would double the standard deduction for many people in the American middle class. If the standard deduction is increased, this could benefit many middle-class taxpayers in the state. Californians are some of the highest taxed people in the US. If the standard deduction is increased at the federal level, this means that the tax burden of Californians could be reduced. This could be beneficial for the housing market.
How? Because more Californians would be able to keep more of their money, which could be used theoretically to buy a home and/or invest in real estate. When large amounts of money are left in the taxpayer’s pockets, it is more likely that they will make major purchases, and homes are at the top of the list.
However, some in the mortgage industry are opposed to increasing the standard deduction as they think it could threaten the mortgage interest tax deduction. In theory, this would potentially reduce home ownership if the mortgage interest deduction were lowered, especially in California given the size of mortgages in the state with its sky-high prices.
It is possible that the mortgage and home equity interest deduction could be limited to $1 million. This would hardly be a benefit to California home owners because homes in the state are much more expensive than in places such as the Midwest. A home that costs $200,000 in Kansas can easily cost more than $1 million in the more expensive parts of California.
But Trump Treasury Secretary claims that the mortgage interest tax deduction will not be gotten rid of, though it is possible that it could be lowered.
Some experts also argue that the mortgage interest deduction does not really drive most middle-class people to buy a home anyway.
Instead, it often encourages those who have decided to buy a home to get a larger one; they are likely to see some of that money back at tax time if they itemize their deductions.
It also is possible that a reduction in the mortgage interest deduction could lower home prices. Californians tend to see some of the highest appreciation in the country year after year. Thus, this change could lower values for some Californians. That might cause more first-time house buyers to pull the trigger and buy a home, though.
Ending State and Local Tax Deductions
If the Trump tax plan becomes law, it is possible that Californians could be negatively affected in some ways. California has some of the highest state and property taxes in the country. If the deduction is ended for both of these to pay for other parts of the tax plan, taxes for some Californians could increase.
This may lead to some middle-class taxpayers not buying homes as it would reduce their net income. Whether it would affect you or not depends upon your income level and where you live. Also, middle class taxpayers in California who do not itemize their deductions would not be affected by this change.
Corporate Tax Rate Cut to 20%
One of the biggest changes in the tax proposal is to reduce the corporate tax rate from 35% to 20%. It is argued that cutting the corporate tax rate would be a net tax cut for the middle class in California and other states because corporations may pass some tax savings onto consumers in the form of lower prices.
Elimination of Estate Tax
If the plan is passed in its current form, it would end the estate tax. That tax currently applies to people and estates that are worth more than $5.49 million per tax filer. This could be advantageous to wealthy Californians who want to pass their estates onto their children.
Raising of Child Tax Credit
Of interest to middle class Californians would be a possible increase in the child tax credit. Californians who are the lower end of the economic scale typically have a difficult time saving up to buy a home. With a large tax credit per child, it could be made easier for those struggling at the bottom of the economic ladder to buy a home. But the changes could lower personal exemptions for breadwinners to a little more than $4,000 per family member. This could be a disincentive for people who have several children.
It is too early to say for certain how many Californians will or will not benefit from the proposed Trump tax plan. It is still up in the air as it has not even been seriously debated in Congress yet. The best plan of action for California home owners and people seeking first time home buyers loans is to keep an eye on the news and how the plan shakes out that comes out of Congress, assuming it passes the House and Senate.
References: Here’s What the Housing Industry Can Expect from Trump’s Tax Plan. (2016 August). Retrieved from https://www.housingwire.com/articles/41385-heres-what-the-housing-industry-can-expect-from-trumps-tax-plan , Realty group fears Trump tax reform would hurt California homebuyers retrieved by http://www.mercurynews.com/2017/09/28/realty-group-fears-trump-tax-reform-would-hurt-california-taxpayers/ and Here’s why Trump’s tax plan will hit Californians especially hard http://www.latimes.com/business/la-fi-trump-tax-california-20170927-story.html