It's no surprise that the San Francisco Bay Area is an expensive real estate market.…
Summary: The president recently signed into law a tax bill that will lower the mortgage interest deduction limit in California. Here’s what you need to know about these tax code changes for 2018.
California is notorious for having expensive real estate markets. As a result, homeowners are always looking for a break when it comes to property taxes, mortgage interest, and other tax-related deductions. The bad news is that some of these deductions are getting smaller.
Last month, President Trump signed the Tax Cuts and Jobs Act, a comprehensive bill created by Republicans in Congress. So it’s now the law of the land. Among other things, this tax policy reform will reduce the the mortgage interest deduction limit for California homeowners. In 2018, the limit will drop to $750,000 — down from the previous cap of $1 million.
A summary of changes under the tax cut bill:
- The mortgage interest deduction cap is being lowered to $750,000.
- State and local property, sales and income tax deductions are capped at $10,000.
- The standard deduction has been roughly doubled.
Mortgage Interest Deduction Limits for California
Among other things, this comprehensive bill will lower the allowable mortgage interest deduction for newly purchased homes in California, from an original cap of $1 million to a new cap of $750,000. But the old limit of $1 million is being grandfathered, which means that those California homeowners who purchased before the new law took effect could still deduct the higher amount.
This part of the tax cut bill could affect quite a few homeowners in the state, particularly those who own properties in the more expensive real estate markets like the Bay Area and some parts of Southern California. In more affordable areas, this change will have less of an impact and affect fewer homeowners.
Bay Area Homeowners Could Be Affected Most
Many Bay Area home buyers will be affected by this change in the tax code, more so than the rest of California. That’s becomes properties in the Bay Area are more expensive, and many are priced well above the (revised) mortgage interest deduction limit for 2018.
According to Zillow, the median home value for the state as a whole was $519,100, as of November 2017. But across the San Francisco Bay Area, the median price was around $893,000. (And it’s over $1 million in some markets.) These are the areas where home buyers could be affected most.
But again, the old deduction limit is grandfathered for existing home loans. So California homeowners with mortgages loans that were originated before this change should not be affected by it.
According to a CNBC article from December 20:
“Under the bill, homeowners who purchased a house before Dec. 15 [of 2017] will be able to continue deducting the interest they pay on mortgage debt of up to $1 million.”
For homes that are purchased after the implementation date, the deduction limit drops to $750,000.
In addition to the mortgage-related changes mentioned above, the Tax Cuts and Jobs Act will introduce other changes that could affect residents across the state of California. For instance, it limits the amount of property taxes, and state and local income tax, a person can deduct from their taxes. In the past, there really wasn’t a limit. But going forward, these deductions will generally be limited to $10,000.