The two chambers of Congress have already passed new tax bills but the final legislation is yet to be made. Homeowners are still hoping that it would turn out to be in their favor. There are three key areas of the tax overhaul bills:
Versions: House vs. Senate
The two versions of the bill from the House and the Senate are quite different, specifically on the deduction on the mortgage amounts. For the House bill, the mortgage interest deduction is restricted to a maximum of $500,000. On the other hand, the Senate bill preserves the current deduction, which is $1,000,000.
It should be noted that many of the expensive homes do not even have mortgage interest that goes over $500,000, although there are some states where homes are high-priced. An example is Hawaii where more than 60% of the homes have mortgages over $500,000. Only 13% of homes exceed the $1,000,000 threshold for the mortgages.
Clearly, more people will be affected by the tax code presented by the House.
Property Tax Deductions
The House bill also restricts the property tax deductions at only $10,000. Meanwhile, the Senate bill proposed that there should not be any tax deductions on properties. The initial proposal was amended and the deductions are maintained at $10,000.
If the Senate did not change the original bill they introduced, it would have affected almost 98% of the homeowners who pay their property taxes. This means that a good part of the population would have been compelled to pay additional tax, specifically the itemize deductions and not the standard deductions.
People with large mortgages, as well as those who give to charitable institutions, would not have the capacity to deduct property tax. With the $10,000 limit, the number of affected homeowners is fewer. However, some states with people who exceed the property tax limit will definitely feel the financial pain.
Capital Gains Exclusion Taxes
Assessing this next part of the tax code is difficult. The required eight-year residency in a home was reduced to five years for the capital gains exclusion taxes. It can be problematic for people who want to move whenever they want as the federal government would collect a tax revenue amount.
Homeowners would no longer behave like before, mainly because a quarter of home sales would face the tax. The possible outcome for this is that homeowners would stay put for a minimum of five years so that they would not pay the tax.
Weakened Home Prices in California and the Other States
While there are differences in the two bills, both the versions of the Senate and the House would have a negative impact on the home prices. This is a result of the decrease in mortgage interest deduction if ever the House’s plan becomes law. It can be bad for new homeowners, especially those in high-cost markets like San Jose.
Home prices may start decreasing because there is lack of demand. However, when it comes to the more-expensive real estate markets, such as Los Angeles, Washington DC, and San Francisco, these places would get the hardest hit. New York, Connecticut, Hawaii, and California are among those states with the most people who pay mortgages exceeding $500,000.
Unfortunately, the changes, if ever they are approved, can make the decision of living in California a bit more of a challenge. It is already hard to stay because it is expensive. If the tax bill becomes law, the changes will hurt California big time.
Buying a home in California would be less affordable with the new GOP tax plan. Additionally, the removal of the deductions for local and state taxes could sharply increase the tax bill in California.
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