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Journal of No. 118


November 2nd, 2017

Yes, let's investigate the new Mortgage Interest tax deduction with math! @ 02:17 pm


The House tax bill would lower the cutoff from $1 million to $500,000. That is, people with home loans bigger than $500K would not be able to deduct the interest from their income.

Doesn't really affect me. Or does it? Duh duh DAH.

The change doesn't affect current loans, so it doesn't affect me.

My loan isn't over $500,000, so it doesn't affect me.

But, and I know many of you will have to ready your tiniest stringed instruments for this, someday we may sell this place and property values being what they are, the new owner will be affected by this change, and it could have an effect on the price we realize.

Let's take an extreme case, how screwed is the person who finances $999,999 on their new house? How big is the deduction they're losing?

If they finance that jumbo loan at 4%, that's $40,000 of interest in the first year, which they'd be able to subtract from their income.

Looks like the new marginal tax rate for income between $45K and $200K is 25%, which is very convenient, so I'll use it. So that $40K of interest saves them $10K in taxes. And the next year it would save them almost $10K, as they ever so slowly pay the loan off. Except that that deduction is going to vanish. So the tax change is gonna cost them $10K a year, and total well over $100K over the loan.

How does that affect home prices? Hard to say. I don't know if many homebuyers explicitly consider the interest deduction, but I have no doubt the lenders do when deciding how much house people can afford.

It's going to affect people's abilities to buy homes right in the range where the median Los Angeles home buyer is buying. (And where the median home seller is selling).

(Our poor sucker will also get hit by the change to property tax deduction. The new plan limits it to $10K. In CA, property taxes total a bit over 1%, so that $999,999 house will have property taxes over the $10,000 limit.)
 
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Journal of No. 118