Cypress, CA – As a Realtor in the Cypress, CA and Garden Grove, CA real estate market, I come across questions regarding the new tax bill signed into law by President Donald Trump.
What is the new bill?
In short, the tax law lowers rates across all seven tax brackets for those filing as individuals and jointly. Additionally, the new law doubles standard deductions for individuals to $12,000 and $24,000 for joint filers. In other words, those with few itemized deductions taking standard deductions are able to exempt twice as much of their income from federal taxation. Likewise, with larger standard deductions, those once preferring to itemize write-offs (i.e. local taxes, donations, medical expenses, and mortgage interest payments), may choose taking standard deductions instead. According to supporters, the tax law and its cut will lead to more investments, jobs, and higher wages. Furthermore, according to the new bill:
Cypress, CA and Garden Grove, CA State and Local Property Tax Deductions Cap at $10,000
Previously, taxpayers were able to deduct what they paid in state and local property, income, and sales tax from their federal returns. However, the new law caps the aggregate at $10,000. Living in a coastal city with high taxes, this can present an impact on your final tax bill. Nonetheless, it should be taken into consideration that many of us don’t purchase properties based on tax deductions. Rather, we purchase a home in Cypress or Garden Grove because these cities are family oriented, offer great opportunities for work, are located in beautiful cities with highly sought after school districts, have easy access to shopping and entertainment, as well as are in a hot real estate market allowing homeowners to build wealth through equity and appreciation.
Cypress, CA and Garden Grove, CA Mortgage Interest Deductions Drop to $750,000
Previously, borrowers were able to deduct interest on mortgages up to $1,000,000. However, the new law drops this to mortgages up to $750,000. A few things should be taken into consideration here. First, the drop does not apply to mortgages taken out prior to December 15, 2017 as previous borrowers are grandfathered in under the $1,000,000 limit. Second, while this law doesn’t affect mortgages under $750,000, one study concludes that of all the mortgages originated between 2013 and 2015 over $750,000, 45.7% are from California. That said, here in Cypress, CA our median home value is $654,000 per Zillow (that’s an increase of 5.1% over the past year) and $575,000 for Garden Grove, CA (that’s an increase of 5.7%). Third, don’t forget we are now receiving double standard deductions, thus this may not affect you if you’re not itemizing.
Cypress, CA and Garden Grove, CA Homes Are Should Continue to Increase in Value
Generally speaking, the deduction changes may push-off buyers from purchasing a home, as they are presented with reduced mortgage deductions. However, the necessity to take out loans in excess of $750,000 is not as common in Cypress, CA and Garden Grove, CA compared to other coastal cities in the Unities States. Additionally, the other benefits the city provides, such as high ranking schools, can outweigh the consequences of the tax law. Furthermore, economists and housing experts are predicting that home values will not decline. If anything, there may just be a slower increase in value.
Investors in Cypress, CA and Garden, CA May See a Win with the New Law
Under the new law, property owners and developers of Cypress and Garden Grove commercial real estate may find the changes rewarding as they will receive a tax-break for their “pass-through” entities. Pass-through businesses are entities which pass income to their owner’s individual tax returns as opposed to paying corporate taxes. These businesses are seeing a 20% deduction. Therefore, owners now get to deduct 20% of their pass-through income and only pay taxes on 80%. Accordingly, we could expect an increase in tax payers establishing pass-through businesses to take advantage of these deductions.
Like-Kind Exchange Continue in Cypress and Garden Grove
Like-kind exchanges of property (AKA 1031 exchanges) are still allowed under the new tax law. These are when investors are allowed to sell one property and buy another by deferring the payment of tax on their gains from the original property.
In conclusion, there are pros and cons with the new tax law; however, in the general sense, homeowners, buyers, and sellers will not experience as a big of an impact as perceived. Here in Cypress and Garden Grove, CA, we will continue to have factors that will outweigh the impacts of the tax law changes. We will continue to live in a family oriented, sought after location, offering job opportunities, high ranking schools, access to shopping and entertainment, and a strong real estate market to build wealth. I understand that this law and its changes may appear frightening and confusing. However, feel free to ask any questions and please note that I am not a tax advisor. Therefore, while I can share my perspective on the law based on my real estate expertise, you should contact your tax advisor.