By Brandon Miller, CFP–
Let’s face it. The cost of owning a home in the Bay Area is crazy high. We pay taxes on top of taxes—at some of the top rates in the nation. Our state taxes alone are the highest of any state in the Union, according to the Federation of Tax Administrators.
But every April 15, homeowners could find a little relief in the form of tax deductions. We could deduct the full amount paid for personal (non-business) state and local property taxes. And that was on top of being able to deduct every dime paid in state and local income tax.
Ah, the good old days.
Sadly, California homeowners may have just been jobbed by the Tax Cuts and Jobs Act (TCJA). That’s because if you itemize your taxes, there is now a cap on how much you can deduct. And it’s way below what many of us have become accustomed to subtracting from our tax bill.
Of course, the TCJA hopes to make itemizing less attractive by doubling the standard deduction to $24,000 for joint-filing couples, and $12,000 for individuals and those filing separately. But that may be little consolation for California homeowners.
Let’s take a closer look at how the TCJA may impact you.
State and Local Tax Deduction Limits
Schedule A of Form 1040 used to be a friend of the homeowner. By itemizing, you could deduct the full amount of your state and local income and property taxes (unless you’re subject to the alternative minimum tax, which disallows these deductions and will continue to do so under the TCJA).
But now you can only deduct up to $10,000—for both income and property taxes. And again, this limit is for both state and local property taxes and your state and local income taxes. Ouch.
Oh, and that home you own in Belize, or anywhere outside the U.S.? There will be no personal property tax deductions for that piece of paradise any more.
There is one way you can potentially deduct a little more from your property taxes. If you have a home office or rent out part of your home, you may be able to deduct the portion of your property taxes allocated to that business or rental use on top of the $10,000. Luckily, we have a lot of entrepreneurial types in the Bay Area who may be able to gnaw on that bone Congress threw to us.
Mortgage Interest Deduction
There are a few changes happening here too, which don’t work in favor of Bay Area homeowners. If you buy a property any time after December 14, 2017, only $750,000 of your mortgage debt is deductible. That’s down from the $1 million it used to be. (Purchases made prior to mid-December of last year aren’t affected by this.) The new deductible limits and effective dates apply to second homes as well.
If you want to refinance a property you purchased before December 14, 2017, you can still deduct the interest on your debt up to $1 million, as long as the new loan doesn’t exceed the amount you’re refinancing. So, if you were thinking of pulling out an extra forty grand to redo your bathroom, that extra amount won’t be deductible.
And you might not want to turn to a home equity loan for that extra cash, either. Starting in the 2018 tax year, you can no longer deduct the interest you pay on this loan in most instances. (Your tax advisor can help you determine if deductions may still apply.) It may make sense to start paying down any outstanding debt you have here as quickly as possible.
As always, it’s best to consult your tax professional to make sure you comply with new rules and don’t lose out on potential gains.
Speaking of gains, one thing Congress didn’t touch are the rules affecting how much you can deduct from your taxes when you sell your home. You can still exclude up to $500,000 in gains if filing jointly and half that if filing individually. If the high cost of living in the Bay Area then becomes too frustrating, you can always sell and go elsewhere.
Or wait until 2025. Unlike the massive tax cuts to corporations that are permanent, the revisions to personal tax codes are set to expire in six years. There’s hope for us yet.
Brandon Miller, CFP® is a financial consultant at Brio Financial Group in San Francisco, specializing in helping LGBT individuals and families plan and achieve their financial goals.
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