On the heels of Congress’ latest deliberations involving tax reform, Partners Trust’s Chief Economist and Vice President of Business Intelligence, Selma Hepp, addressed the larger implications of the “so-called” Tax Cuts and Jobs Act on California’s housing market. Her latest Economic Straight Talk suggests that the new tax bill, which effectively passed this week, could negatively affect most of California’s coastal housing markets. The following summary illustrates the most pressing takeaways concerning housing-related tax changes, standard deductions and corporate deductions.
To begin, deductions of state and local taxes would be capped at $10,000. The mortgage-interest deduction would be capped at $750,000—which is slightly better than the House’s proposed $500,000 but down from the current $1 million—and would be allowed on first and second homes. This $250,000 difference means about $10,000 less in mortgage-interest deductions in the first year of amortization. In total, a new buyer would lose about $25,000 in deductions in the first year of purchasing a home priced around $1.2 million. The impact is disproportionately more harmful to new homebuyers than existing owners.
Currently, a $6,350 standard deduction for single taxpayers and $12,700 for married couples filing jointly exists. Under the new tax reform, those figures will jump to a $12,000 standard deduction for single taxpayers and $24,000 for married couples filing jointly.
Deductions for businesses appear favorable, as corporate taxes would be reduced from 35 percent to 21 percent. Currently, pass-through businesses—which include partnerships, limited liability companies, S corporations, and sole proprietorships—pass their income to their owners, who pay tax at their individual rates. The new laws would allow owners to apply a 20 percent deduction to their business income, subject to limits that would begin at $315,000 for married couples.
To read Selma Hepp’s full analysis, click here.