21 Dec 2017

What Does the Tax Bill Mean for You?

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As you no doubt know, the house and senate have reconciled a new tax bill, which the president is expected to sign into law, possibly right after the new year. Many of the changes to the tax code have a direct impact on hom buyers, especially in higher-cost areas like San Francisco. While there is still much to be cemented, we do have some clear vision into likely impacts. Here’s what you need to know about the new tax bill, and what actions you can take today to potentially mitigate the impact before it goes into effect.

Mortgage Interest Deduction

Under the new code, the mortgage interest deduction will be capped at $750,000, down from the current cap at $1 million. This only affects new mortgages. Existing mortgages will not be affected, nor any mortgage on a home that went into contract by 12/15/17 and will close by 3/31/18.

Of course, this puts the deductible amount well under the price of homes in San Francisco. Current median price for a condo is $1.2 million, for which only 62.5% of the mortgage will be deductible. The median price on a single-family home is 1.475 million, so only about half the mortgage will be deductible. Consider this when deciding how much to put down on a house, or to retroactively refinance.

Another important change to the deductible concerns HELOCs. Until now, interest on a HELOC of up to $100,000 was deductible, but now there is none at all.

There is currently no change to 1031 exchanges for real estate.

Other Deductions

There will now be a $10,000 cap on property tax and state and local tax (SALT) deductions. Again, this disproportionately affects high-cost areas like San Francisco.

Casualty loss deductions, as from fires or other disasters, are being eliminated. This is all the more reason to reassess and make sure that you are sufficiently insured.

Owners of electric cars can breathe a sigh of relief: The electric car credit remains intact.

What You Can Do Now

If cashflow allows, there are a couple things you can do to take advantage of the current tax code before the changes go into effect:

  • If you are a homeowner, consider paying off the second installment of your property tax. Though it’s not due until February, by paying it in this year, you may be able to deduct the amount against the current tax code.
  • If you are an independent contractor or otherwise do not have taxes automatically taken from your paycheck, consider paying all your estimated state and local taxes for 2017 now.

It’s not certain that these actions will work, but it is far more certain that those deductions will not be available in 2018. As always, be sure to check with your tax professional for the most accurate and up-to-date information.

Many thanks to David Wines, CFA, President and CFO of HighMark Capital Management, and Jayne Hartley, Director of The Private Bank, for breaking this down for us.

Photo by CafeCredit under CC 2.0

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