How the proposed tax bill may cost some Californians up to $16,000 (or more) in additional federal taxes annually:

 The proposed tax changes seems to be attacking the upper-middle class home owners, specifically those in higher cost areas of the country such as the San Francisco Bay Area. In my opinion there should be some geographic consideration to these bills as the cost of living is 3-4 times higher than in some regions of the county and many people in these higher cost areas survive via the current tax breaks which are now on the chopping block. I ran some numbers and I got a $16,048 increase in federal taxes based on these proposed tax cuts. As a Bay Area Realtor I am also disappointed at the amount of home ownership benefits that Trump is taking aim at with this bill. 

Disclaimer: (Everyone's tax situation is unique and requires specializes treatment and expertise so seek your own personal CPA or Tax Adviser). 

Running the numbers: Let's assume you are a hard working Bay Area family who makes $300k per year and have a high mortgage balance, you could be facing as much as $16,048 in additional Federal taxes. Here is how it all stacks up: 1) The current mortgage interest cap is set based on loans up to $1M balance for each tax payers primary residence. So, if you have a 30 year fixed, $1M loan balance @ 4% there is ~$39,000 in interest due on that loan annually which is tax deductible expense. If you are in the current 33% tax bracket (which you would have to be to get that loan) under the current IRS code you would be eligible for a tax savings of 33% * $39,000 = $12,870 that $1M loan cap is on the block to be cut in half to $500k.  2) The property tax deduction is also on the block to be capped at $10,000 so for those who live in the Wyndemere community in Danville, CA as an example, where the property taxes on a $1.4M home are 1.6% and the home owners, as my Banker, (who lives there), put it "pays a new Honda's worth of property taxes each year at ~$22,400." Then that will be another $12,400 less in deductions or $4,092 more in Federal taxes owed at the 33% rate. 3) They also want to remove the state income tax deduction as well of 10.3% (assume $15,773) based on a family of 4 with $50k in state tax deductions. Those three line items could cost you a combined total of: $6,435+4,092+5,521 = $16,048 but hey you love the federal government and want to pay more taxes right? 

The irony of these proposed tax incentives are being removed by President Trump who has built his wealth on real estate investing (and avoiding paying any personal federal income taxes) should not be overlooked by any voters either. If we are looking at chopping away at the benefits of home ownership then why don't we aim squarely at Trump's favorite deduction, which is the accounting concept of depreciation. Depreciation is tool used by the rich and the mega rich (with investible assets of $2,000,000 or more) to increase the cash flow and decrease the tax liabilities on the rental (or other income generating uses) of real property and other physical goods to write-off a portion of the useful life of the asset each year. The assumption is that a printer or other equipment falls in value each year that is owned so that is why depreciation as an accounting concept exists. However, with real estate the properties over time, have consistently gone up in value but the real estate investors like Trump still get to take the depreciation write-offs year-after-year shielding the rent from being taxed. A novice tax payer may assume well if a property runs low in depreciation or the investor can get better rents or a nicer building with the appreciated property then they would pay tax on both the depreciation re-capture on those gains, right? Not really, they regularly use a process called a 1031 exchanged to roll their gains into bigger and bigger properties without being taxed. Well surely when they die and have all of this highly appreciated property they would pay some gains, right? Well not if Trump gets his way. 

He wants to double the Estate tax exemption from $5.5M to $11M immediately and phase out the estate tax completely by 2024. If you look back into the historical archives of our forefathers they were really wise and they knew that wealth in America needed to turn-over and so they enacted the estate taxes to keep a few families from lording over the rest of the counties citizens. According to Forbes Donald Trump is worth $3,100,000,000 https://www.forbes.com/donald-trump/#483d73d82899 and you can bet your very last penny that he wants nothing more than abolish any tax implications to his estate especially at the current estate tax rate of 55%.  

To learn more about how to take advantage of some of the current tax benefits which are slated to either be grandfathered in such as the larger mortgages etc. verses those that could change like the property tax cap and the state income tax deduction etc. Please contact the Arneson Real Estate Group and will be happy to work in collaboration with your tax professional to help you optimize your real estate holdings or plan for some of the pending tax changes. We can be reached at: arnesonhomes.com or [email protected] or by phone at: (925) 448-4416. Thanks for reading!