How is tax reform impacting the San Diego real estate market?
I’m not a tax professional. If you have specific tax questions, I can get you in touch with a CPA or tax attorney. That said, I can go over the tax reform items that relate to real estate.
First and foremost, the mortgage interest deduction used to be capped at $1 million, and they dropped that limit down to $750,000. If you had your mortgage prior to December 15, 2017, you’re still allowed to write off that $1 million mortgage interest because you’ve been grandfathered in.
Obviously, this change impacts people with mortgages of $750,000 or more.
The other component is the change in the state and local tax deductions, or the SALT deductions. These deductions used to be unlimited. You could write off your state taxes, city taxes, and property taxes. Now, the SALT deduction has been limited to $10,000.
If you own a $1 million property in San Diego, your base tax rate is 1%. That means the property taxes alone would be $10,000 and that’s your limit. You can’t write off any other state or local taxes.
If your property taxes are $10,000, you’ve already reached the state and local tax deduction cap.
There is a lot of interesting psychology in the marketplace because of these two tax changes. The California Association of Realtors has put out multiple scenarios taking these two factors into account, as well as the new standard deduction and the reduction in the tax rate. Almost all of their scenarios show people paying less in taxes, but the incentives of homeownership from the tax perspective have weakened.
That said, everyone has to live somewhere. If you’re paying rent in San Diego, you are paying someone else’s mortgage. By owning a home, you pay your own mortgage and have the benefits of long-term appreciation.
The psychology of what’s going on right now is causing some people to pause, but that’s not necessarily a bad thing. We’ve had years and years of low inventory and high demand, which means we’ve spent a lot of time in a seller’s market. I think that it’s healthy for the market to pause a bit.
I am still a big proponent of homeownership. When you pay rent, you can’t write off the rent at all. Even if deductions have been reduced, you may be able to make it up with some of the benefits of the tax reductions in your bracket. You may be able to pass through an entity, like a corporation, S Corp, or independent contractor, and write off 20% of your profit off the top.
Overall, tax reform may affect some higher price points and cause people to pause a bit, but once we get through this psychological shift, things will start to normalize and we’ll have a good feel of where the market is headed. Right now, the market is still being driven by supply and demand.
If you have any more questions about our current real estate market, just give me a call or send me an email. I would be happy to help you!