As we move into the holiday season the GOP has provided a less than cheerful topic for the Thanksgiving dinner table, a new tax plan. The recently released House Republican tax bill contains significant changes that are important for Lamorinda homeowners to understand if this bill passes. Californians already face the nation’s highest state income tax rate of 13.3% and when combined with the highest Federal rate of 39.6%, you end up paying income taxes of 52.9% of your income.
Under the proposal there are three changes for homeowners: First is a reduction in the amount of mortgage interest that can be deducted; Second is a new cap on property tax deductions; Third are limits to the capital gains exemption used by homeowners when they sell. Current homeowners are allowed to deduct interest paid on mortgages valued up to $1.1 million, but the proposal cuts the cap to $500,000 for future purchased homes. Also, the bill limits the mortgage interest deduction to only your primary residence, ending the deduction for vacation homes. For anyone with a mortgage more than $1.0 million this would effectively cut your deduction in half. Mortgages over $1.0 million are commonplace in Lamorinda where the average home price is now $1.6 million.
Under the tax plan the deduction for property taxes will be capped at $10,000. With local property tax rates close to 1.2% the proposal would effectively eliminate any deduction for assessed home value more than $830,000. Likely the most important change, is the limitation of capital gains exemption on the sale of your home. Currently married couples can exclude up to $500,000 in capital gains from the sale of their primary residence if they have lived in their home for two of the last five years. Under the bill the period will increase to five of the last eight years and you will begin to lose the gain exemption if the income of married couples exceeds $500,000. Combined with the deterrent that CA Prop 13 provides to potentially selling your home (e.g. the step-up in your assessed value of your home) this provision will put further handcuffs on families looking to move up into larger homes and empty nesters looking to downsize.
We are concerned about the impact this bill will have on our housing market and our community. Please call us with your real estate questions - Erin at 925.951.3817 or Darrick at 925.900.8218