While it passed before the end of 2017, I wanted to take a closer look at the tax bill to discuss out it might affect the Bay Area market as a whole, as well as individuals in California. So here goes...
Reduction in mortgage interest deduction - Mortgage interest will only be deductible on the first $750,000 of a home loan (previously $1.1 million). Mortgages in place before Nov. 2, 2017 will be grandfathered in and can be refinanced up to $1 million ($100k equity line eliminated). While I don't expect this change will keep a buyer from transacting, I can imagine sellers staying in place to not lose that original mortgage interest deduction amount.
Reduction of SALT deduction - Unfortunately we're not talking sodium. SALT = State and Local Taxes (state income tax, property taxes, etc) were previously used as a deduction to reduce your federal taxable income. The bill capped this deduction at $10,000. For many high earners in the Bay Area this will have a significant affect in 2018. State Senator Kevin De Leon put forth a bill that could help lessen the blow to CA taxpayers by allowing their state and property taxes to be made as charitable contributions to the state in order to be deductible. Read more here.
Change in individual tax rates - On a whole the rates for the 7 tax brackets came down, but the threshold for the highest tax bracket went from $1 million to $600,000. This could mean more income taxed at a higher rate for many individuals and couples in Silicon Valley.
Corporations can repatriate profits held overseas at a lesser rate than before (now 15.5% vs. previous 35%). Apple recently announced their plan to bring back $245 billion of its cash held overseas. Some big questions are 1)will companies invest this money into new facilities and jobs and 2)will they choose to invest in more affordable U.S. markets with lower taxes (i.e. not the Bay Area/California)? If Apple does invest significantly in the Bay Area that could increase housing demand further on the peninsula.
What didn't change:
Exclusion on primary residence remains at $250k for individuals (or $500k for couples filing jointly) on gains on a primary residence if they have owned the property and resided in it for 2 of the last 5 years. The preservation of this exclusion allows for buyers to move up in our market without being penalized.
Step-up in basis upon death of a spouse - this rule allows the basis to reset at the time of death, effectively forgiving any gains on a home that appreciates over the course of ownership. This keeps many longtime owners in Silicon Valley from selling to avoid a massive capital gains exposure.
Ever since our market started its recovery following the recession, we've been in an inventory constrained environment. The likelihood of that changing as a result of the new tax bill is low, as there are no new obvious incentives for longtime owners to sell. While some of the previous incentives for homeowners have been reduced, we might see more people opt to continue renting rather than buy. This might affect sales at the entry level up to $2 million price points more. However, those are the price points where we continue to have super strong demand - people still need a place to live and might proceed with owning despite the reduction in tax benefits.
On the plus side with the reduction in the corporate tax rate, companies will have more money to invest and compensate their workers. As the equity market holds strong, this gives buyers in higher price points the ability to transact.
Time will tell if the allure of Silicon Valley as an innovation leader/hub continues if affordability issues remain and the increased tax burden makes it difficult for companies to stay here.