August 25th, 2020
I’ve been hearing a lot of belly aching about the tax cut plan bill passed by the House today. So I thought I would put pen to paper and do the damn math to figure out to the best of my ability* how might the Tax Cut and Jobs Act affect Palos Verdes Real Estate.
According to Bankrate.com, to buy the average priced home with 30% down in Palos Verdes Estates (as of 11/17/2017 based on closed slaes, this is $1,793,504) you would need income of $300,000 assuming car payments, some credit card debt, property taxes and insurance. You can use this link to calculate for yourself. (you can get other charts on Palos Verdes Estates real estate here)
How might the Tax Cut and Jobs Act affect Palos Verdes Real Estate?
In the 2016-2017 tax bracket world, $300,000 in income puts you in the 33% tax bracket. Writing off your interest (up to $1,000,000 of loan) and property taxes does this
Loan amount = $1,255,452 but only $1,000,000 is deductible @ 3.87% interest = $38,750 in write offs
Property Taxes $1,793,504 @ approx 1.15% = $20,625 in write offs
$300,000 income less $59,375 and then less the 2016-2017 standard deduction of $12,700 is taxable income of $227,925 @ 33% tax rate is tax liability of $75,215
How about under the new tax plan, what happens…
Well, now you can write off only $500,000 of your total mortgage so that’s $19,375 in writeoffs and you can only write off up to $10,000 in property taxes. So now your write offs total $29,375 instead of $37,750. And it appears the Bill passed today in the House, and still must be reconciled with the Senate, that $300,000 income puts you in a 35% tax bracekt. But the standard deduction is up to $24,400. So, $300,000 less $29,375 for interest and property taxes and then less $24,400 for the standard deduction leaves taxable income of 246,225 and at a 35% rate, that’s tax liability of $86,178.
So in essence, as it is now, the average priced home in Palos Verdes Estates is going to cost you with the stated assumptions, about $10,963 more per year.
Will that “cost” be enough to make prices drop? I don’t think so. There is still high demand and low supply with many well priced listings experiencing multiple offers. Let me put it another way, with Palos Verdes homes sale prices being 98.58% of listing price, do you really think that $10,963/year is going to make that much of a difference in the buying behavior of buyers? Again, I don’t think so. [CORRECTION BELOW]**
Add to this demand pattern the forecasted booming economy in part due to tax reform, inflationary pressures which traditionally have boosted real estate values and you can reasonably conclude any deletrious effects of limiting property tax and mortgage deductions may be greatly offset by positive macroeconomic factors
This will only make sellers be smarter about not overpricing their homes.
*I am not qualified to give tax advice so please consult with your CPA to review the accuracy of this analysis.
**Received from one of our associates and to whom I am very grateful. Thank you Brenda Holcomb
At the Christmas party I heard you mention the tax cut not affecting PV real estate and that you had broken down the numbers. I admire your experience and insights so I was intrigued to read your blog.
Your post is excellent!! I like the way you organized the information and love the details.
Me being a number person, I followed along with the calculations and see they need some tweaking. It’s due to the tax rate being a marginal tax rate, not an effective tax rate.
You are correct that a person having $227,925 in taxable income this year will be in the 33% bracket, but he would not be paying 33% of that total. He only pays 33% on the amount above the previous bracket cap (191,650). He would pay $46,569 + 35%(227,925-191,650) = $58,615. https://taxfoundation.org/2017-tax-brackets/
Likewise, the 2018 taxable income of $246,225 would be taxed at 35% only for the portion over the previous bracket cap (195,450). He will pay $47,644 + 35%(246,225-195,450)= $65,340. https://taxfoundation.org/2018-tax-brackets/
The difference in taxes between the two years is only $6,725. [not $10,963/year]