Mortgage Interest Deduction Change May Cause Small One Time Effect for Homes Valued Between $1,000,000 and $1.3M
Don’t believe the scare
headlines. The proposed change in the mortgage interest deduction from a cap of
$1,000,000 to $750,000 for new loans will have almost no impact on prices of
homes in the Los Angeles area. It is true that California will be impacted more
than almost any other area in the US., but the impact will be modest, to say
the least.
Under current tax law, the mortgage
interest deduction is capped at $1,000,000 of loan outstanding. If you have a
loan with a balance of $1,200,000, you are not able to deduct the interest on
the $200,000. If the interest rate is 4%, you would effectively not be able to
realize $8000 per year of deduction, due to the cap. This taxpayer is likely to
be in the 33% tax bracket, so the actual cost per year would be $2667 per year.
Under the new rules, the mortgage interest deduction cap would drop to $750,000. In the worst
case scenario, someone buying a home under the new tax plan that required a
$1,000,000 loan would now lose the deduction on $250,000 of interest. Again, if
we assume 4% interest, that would be $10,000 per year, and if the taxpayer was
in the new 35% bracket, the actual out of pocket cost would be $3,500 per year
or about $300 per month. So, in the very worst case scenario, the $300 per
month difference would mean this individual might now only be able to afford a
$1,200,000 home instead of a $1,250,000 home.
It is likely that there will
be some impact on homes between $1,000,000 and $1,300,000. However, the impact
will be a one-time event.
If you would like to review
the impact of the new tax bill on your plans with regards to buying or selling residential
real estate in California, please call Whit Prouty today for a closer look at
your exact situation. Call 310-777-6302
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