By now I am sure you have heard of the proposed new tax bill currently being proposed in Washington, and you will certainly know that this would be a disaster for the housing market, especially in California.
Here is what is proposed:
The interest deduction cap will be cut in half from $1 million to $500,000.
Property tax deductions will be capped at $10,000.
Currently you can deduct $250K for a single or $500K for a couple in capital gains on the sale of your home in which you have lived for a total of two of the five years before the sale. You can also take this deduction once every two years. The bill proposes that homeowners would have to live in the home for five years. That deduction would also be phased out for higher income levels.
Mortgage interest deductions would be eliminated for second homes.
The deduction on home equity loans (HELOCs) would be eliminated.
Not related to housing but of equal import is the proposal to eliminate the deduction for state and local taxes.
So what does this mean for the housing market, especially in California?
One of the main incentives and benefits of homeownership is the ability to deduct property taxes and mortgage interest which motivates prospective buyers to look at the benefits of owning versus renting. Removing these incentives is certainly a deterrent.
We also have a huge shortage of housing, especially in the Los Angeles area. The requirement that homeowners need to have lived in their homes for five years before they are able to deduct capital gains is going to further limit the number of homes on the market. Currently around 15% of sellers sold their homes after living in them for around two to four years.
Affordability is going to be affected. The elimination and decrease in deductions is going to make what is already an unaffordable market even less affordable, especially for first-time home buyers. This potential market is going to start looking at other investment opportunities and property values will start to drop.
Make your voice heard. Tell Washington they should not look to make money off the back of homeowners.
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