Don’t believe the scare headlines. The proposed change in the mortgage interest deduction from a cap of $1,000,000 to $500,000 for new loans will have almost no impact on prices of homes in the Los Angeles area. It is true that California will be impacted more than almost any other area in the US., but the impact will be modest, to say the least.
Under current tax law, the mortgage interest deduction is capped at $1,000,000 of loan outstanding. If you have a loan with a balance of $1,200,000, you are not able to deduct the interest on the $200,000. If the interest rate is 4%, you would effectively not be able to realize $8000 per year of deduction, due to the cap. This taxpayer is likely to be in the 33% tax bracket, so the actual cost per year would be $2667 per year.
Under the new rules, the cap would drop to $500,000. In the worst case scenario, someone buying a home under the new tax plan that required a $1,000,000 loan would now lose the deduction on $500,000 of interest. Again, if we assume 4% interest, that would be $20,000 per year, and if the taxpayer was in the new 35% bracket, the actual out of pocket cost would be $7,000 per year or about $600 per month. So, in the very worst case scenario, the $600 per month difference would mean this individual might now only be able to afford a $1,100,000 home instead of a $1,250,000 home.
On the other hand, someone who can afford a $1M home may not be worried about the extra $600 a month. As you look at the less extreme examples, the affordability difference becomes almost inconsequential. A potential buyer who is looking at a $600,000 mortgage will lose about $70 a month in buying power.
It is likely that there will be some impact on homes between $700,000 and $1,300,000. However, the impact will be a one-time event.
If you would like to review the impact of the new tax bill on your plans with regards to buying or selling residential real estate in California, please call Whit Prouty today for a closer look at your exact situation. Call 310-777-6302