2-1 MA Finance – Braun – UPDATE
Responses provided by Jane Braun, CFP® Financial Advisor with Manning Wealth Management.
• Does the change in tax law impact whether or not homeowners should impound for taxes and insurance?
An impound account protects the mortgage company’s interest in the property because they know that the homeowner’s insurance will not lapse and the property taxes will be paid on time. In California, impound accounts do earn nominal interest, which is taxable. It will continue to be a personal decision to impound or not, if the homeowner has the choice. Anecdotally, when the tax bill passed in late December, borrowers with impound accounts were flummoxed with the decision to pre-pay in 2017 their tax bill due by April 10, 2018. That’s because the mortgage interest statement (Form 1098) would not match up with the property tax deduction listed as an itemized deduction on Schedule A of the tax return. Homeowners were cautioned that paying the extra payment could trigger scrutiny by the IRS which could result in an audit of the 2017 1040 return. Based on the record amount of San Diego County homeowner’s who paid a third installment prior to year end, it appears that many taxpayers threw caution to the wind.
• How will Trump’s tax reform impact homeowners who purchased their home prior to the new tax plan?
In my humble opinion, I don’t think anyone will sell their home to purchase a home at lesser value to pay less in property taxes. Home ownership in California is an investment in real estate, but most importantly it serves a utilitarian purpose and the primary reason individuals and families purchase a home is to live it in it and put a roof over their heads.
• Do you feel that the new $10,000 deduction limit for state and local income tax AND property tax combined with the new mortgage interest deduction limit of $750,000 (of debt principal) could slow down or “cool off” the southern CA housing
No, the SoCal housing market will not cool off because home ownership is a function of supply and demand. There are more individuals and families seeking home ownership then there are homes available. The economics, not to mention the weather and the lifestyle, contribute to the ongoing increase in home values in SoCal. The limits on state tax deductions will not effect demand for home purchases. There has been a limit of $1M of mortgage interest deduction in place and that has not prevented home owners from taking out mortgages that exceeded $1M. Home ownership provides satisfaction far beyond the tax benefit of owning a personal residence. Owning a home adds a capital asset to one’s balance sheet; as the value grows, so does the potential for growth in net worth for the home owner. And non-pragmatically, who doesn’t appreciate the quiet enjoyment of one’s own home? A personal residence provides pride of ownership that will not be diminished by a reduction in tax benefits.