GOP tax plans could be painful for Orange County homeowners

By Jeff Lazerson

11/16/17

What I think: Every day feels more and more like we all have the honor of being lifetime indentured servants to all of the various taxing authorities.

Californians already have the highest state income tax rates. On the heels of California’s increased gasoline tax, the House and Senate tax proposals are bad news for most Orange County homeowners.

Here is what is on the table:

Mortgages: Currently mortgage interest deductions cap out at $1million for a first mortgage and $100,000 for a second. The House plan caps deductions for interest on just the first $500,000 of debt for mortgages issued after Nov. 2. The Senate plan caps it at $1 million without any exemptions, according to Bloomberg Tax.

According to 2017 second-quarter CoreLogic data, there are 535,750 outstanding Orange County mortgages. Just over 79,000, or 14.8 percent, of those mortgages are greater than $500,000 and less than $1 million. Almost 8,800, or 1.6 percent, are $1 million or more.

From January through September, total home sales were 28,932. Of those 13,796, or 47.7, percent sold for $700,000 or more, with mortgages likely to exceed $500,000, according to CoreLogic.

Assuming the same number of future buyers take out mortgages larger than $500,000, plenty of homeowners might get hurt tax-wise on the House mortgage interest deduction plan.

The House plan also eliminates mortgage interest deductions for second homes (goodbye to your desert or mountain home). The Senate version retains it.

Property taxes: The House plan allows up to $10,000 in itemized deductions for local property taxes. The Senate proposal eliminates individual itemized state and local property tax deductions.

About 75,812 Orange County residential parcels, or about 10 percent of the 763,820 parcels in the county, have an assessed value of $900,000 or more and a total property tax bill of $10,000 or more, according to Orange County Tax Assessor Claude Parrish. That includes the 1 percent base tax plus added assessments for things like Mello Roos, library districts, water districts, etc.

The Senate plan bites every homeowner by eliminating all property tax deductions.

Capital gains exemptions: Both House and Senate proposals would require you to stay in your residence for five of the last eight years to exempt $250,000 of capital gains for a single person and $500,000 for married couples. Currently, the rule is at least two of the last five years in your residence to qualify for the exemption.

Homebuying: The biggest losers could be renters.

With both plans, there is a proposed increase in standard tax deductions. Some people may find less incentive to purchase with an increased standard deduction. Historically, most Americans have built family wealth from the forced savings of paying down the mortgage in addition to property appreciation.

Rate news summary: From Freddie Mac’s weekly survey: The 30-year fixed rate averaged 3.95 percent, 5 basis points higher than last week’s 3.90 percent. The 15-year fixed averaged 3.31, 7 basis points higher than last week’s 3.24 percent.

The Mortgage Bankers Association reported a 3.1 percent increase in loan application volume from the previous week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $424,100 loan, last year’s rate of 3.94 percent and payment of $2,010 was $3 less than this week’s payment of $2,013. Wow! Talk about back to the future.

What I see: Locally, well qualified borrowers can get the following fixed-rate mortgages at one point: A 15-year at 3.0 percent, a 30-year at 3.625 percent, a 15-year agency high-balance ($424,100 to $636,150) at 3.25 percent, a 30-year agency high-balance at 3.875 percent, a 15-year jumbo (over $636,150) at 3.625 percent and a 30-year jumbo at 3.875 percent.

If you have questions or comments, please contact Jeff Lazerson by clicking here.