The tax plan that President Donald Trump signed into law on Dec. 22, 2017, is a dagger pointed at the financial heart of Orinda.
According to real estate brokers and accountants, home values in Orinda will plummet 10 percent to 20 percent.
Effective in January 2018, federal income-tax deductions that benefit Orinda homeowners will be reduced or eliminated.
Orinda-based real estate broker, Alexander Gailas of AG Realty, said the new tax bill will put “a huge dent in real estate.” He added that demand for real estate “will diminish.” Asked if the federal government is pointing a gun at the head of Orinda homeowners, Gailas said, “Yes.”
Orinda is not the only place affected. Similar high-income communities like Lafayette, Moraga, Danville, and Alamo will experience the same consequences.
An accountant who lives in Moraga, said that the Trump tax cut will hurt home values in Orinda and nearby communities.
If an Orinda home now valued at $2 million loses 20 percent of its value, the loss would be $400,000.
Currently, the mortgage interest on a home loan of $1 million (or a lower amount) is deductible from federal income tax if the taxpayer itemizes his tax return. Also, state and local taxes, such as the property tax, can be deducted from taxable income. Again, this deduction applies to individuals who itemize their federal tax returns.
For a person holding $1 million mortgage, the annual interest on such a loan for the first 10 years can be $40,000. The property tax on a $2 million home can be $20,000 (or more) a year.
Currently, an Orinda homeowner with annual income of $100,000 and a home worth $2 million can deduct, if he itemizes his federal tax return, $40,000 a year — for the first 10 years of the home loan — for mortgage interest. He can also deduct at least $20,000 for property taxes. Thus, the $100,000 of original income goes down to a taxable income of $40,000. ($100,000 minus $40,000 for mortgage interest and minus another $20,000 for property taxes, yields a taxable income of $40,000). These figures assume a 30-year, fixed-rate mortgage at 4 percent. The calculations come from <www.interest.com>.
Under the bill signed by the president, mortgage interest is deductible on a loan of $500,000 (or less). The property tax deduction is limited to $10,000. Thus, the person an with annual income of $100,000 will be able to deduct $38,000 a year in mortgage interest for the first 10 years of the loan and $10,000 a year in property taxes. The taxable income will be $52,000. ($100,000 minus $38,000 for mortgage interest minus another $10,000 in property taxes yields a taxable income of $52,000.) The tax liability is 30 percent higher. ($52,000 is 30% higher than $40,000.)
These calculations are somewhat simplified. They do not include a possible alternative minimum tax or other tax changes associated with the bill President Trump has signed.
The owner of a $2 million home might find that a potential buyer, because of the loss of tax deductions for the buyer, might demand that the seller lower his price.
Some people have speculated that the loss of tax deductions for home ownership is punishment for residents of states which, in 2016, voted for Hillary Clinton for president. States such as California, New York, New Jersey, and Illinois, all of which voted for Mrs. Clinton, are high-tax, high-service, and generally high-income states — states that have obtained benefits from home-related tax deductions.
The loss of the deduction for state and local taxes may increase the difficulty of asking for state and local tax increases. Homeowners may resist plans for higher taxes because the cost of home ownership is now higher.
For the last 100 years, home ownership has been a main goal of the federal government.
A president of the United States once said: “A nation of homeowners, of people who own a real share in their own land, is unconquerable.”
Another president said: “We’re creating . . . an ownership society in this country, where more Americans than ever will be able to open up their door where they live and say, welcome to my house, welcome to my piece of property.”
Which president is associated with which quotation? Do you give up?
Politically, the two presidents were not at all alike — except in the area of home ownership. One can call these two presidents “the odd couple.”
The first quotation comes from Franklin D. Roosevelt, a Democrat, and president from 1933 to 1945.
The second quotation comes from George W. Bush, a Republican, who served as president from 2001 to 2009.
Americans will have to decide if President Trump has reduced or eliminated the federal government’s goal of making home ownership national policy.