It takes a lot of gold to live in the Golden State, more so than the rest of the country. For Los Angeles, the cost of living in is 43% above the national average…and it’s getting more expensive for homeowners.
The recently passed Republican tax plan redefines rules that have shaped the housing market for decades.
Prior to 2016, homeowners were able deduct interest paid on as much as $1 million of mortgage debt from their taxes. The new tax reform allows that rule to remain in effect for existing and in-process loans, but the interest deduction on new purchases will only be for the first $500,000.
For the record, approximately 20% of Californians have residential loans that exceed $500,000, according to the National Low Income Housing Coalition. The percentage of people with big loans jumps to more like 50% when you talk about the pricy homes of the urban elites in Los Angeles, San Francisco and San Jose. As a point of reference, in September 2017, the median price for a single-family home in California was $555,410, according to the California Association of Realtors. In Los Angeles County, the median for all homes — houses and condominiums — was $575,000 according to CoreLogic.
As a point of reference, approximately 489,000 tax filers in the state would pay an average of $3,290 more in federal taxes if the $500,000 mortgage interest cap covered current loans, according to the nonpartisan Tax Policy Center.
…If the transformation in interest tax deduction is not enough incentive for Los Angelino homeowners to stay where they live, let’s add the change limiting property tax deductions. In one of the more controversial elements of the GOP tax overhaul, there is a new $10,000 annual cap on total deductions for state and local taxes, including income and property taxes. The limit on property-tax deductions impacts properties assessed at more than $800,000, which means many homes the Los Angeles area. The rule disproportionately affects higher-tax and traditionally Democratic states such as California, New York and New Jersey.
Bloomberg.com confirms prior to the property tax limits, anyone who itemizes their deductions on their federal tax return could subtract their state and local property taxes, as well as their state and local income taxes or general sales taxes.
In their bid to pay for the trillions in tax cuts and simplify the tax code, Republican leaders have proposed repealing most itemized deductions. The state and local tax deduction — aka SALT — is the biggest among them. Repealing it fully could bring in more than $1 trillion in revenue over a decade.
Given California’s high-income tax, the loss of the state and local deduction hurts. In 2014, Californians claimed $27 billion in federal deductions for state and local income taxes for real estate, personal property and other taxes, according to the California Franchise Tax Board. The average state and local tax deduction taken in California in 2015 was nearly $8,500 more than the new proposed cap, according to the Tax Policy Center. The majority of the SALT deductions claimed by those who make less than $50,000 come from property taxes, according to a report from the Government Finance Officers Association. By contrast more than 70% of the SALT deductions from those making more than $200,000 are due to income.
The results of the tax overhaul are bittersweet. Many Californians can expect to pay less taxes in 2019, according to the Institute on Taxation and Economic Policy. But the segment of people who will pay more is higher in California than in most states – 11%, or nearly 1.9 million taxpayers. And this percentage will rise over time. Economists notes that the bill changes how inflation is calculated, slowly pushing people into a higher tax bracket. By 2027, when most of the individual changes have expired, nearly 5.5 million, or 28% of California taxpayers, will see a higher tax bill.
“I think it could be a little bit of a restraint on growth,” observed Dave Smith, an economist at the Pepperdine University Graziadio School of Business and Management. “It won’t necessarily lead us to a turnaround or heading to a negative direction, but it will certainly pull back some of the positive things.”
In the future, state and local lawmakers would presumably face heightened pushback if they sought to raise taxes that couldn’t be deducted at the federal level. That would limit the ability of California to tax itself to fund more services or to close a budgetary gap, as it did in 2012 when voters approved higher income taxes on the state’s wealthy residents.