Now since we know who will be occupying the White House, I’m going to give a quick overview of the many new tax and regulatory issues that will be effecting real estate. Some of these changes will be national is scope, and some applicable only to California or Los Angeles County or City.
As a disclosure some of these changes are already set to take effect on a specific date, several are still being negotiated or written, or are presently being contemplated by governmental representatives. There will be obvious changes to many, as consumer groups, industry lobbyists, regulators and politicians will have their say with each one. What we do know is the Dodd-Frank Act, and Obamacare is here to stay, and all local and federal budgets are strapped for cash, and nothing is off the table.
The Mortgage Debt Relief Act of 2007 is set to expire Dec 31, 2012. The law exempts up to $2 million in mortgage debt forgiven by a lender in a short sale, or loan modification from taxation. If the relief law is not extended, homeowners will have less incentive to pursue short sales or loan mods, because any forgiven debt could be considered taxable income.
The Act prohibiting a lender to sue a borrower for a Deficiency Judgment on the loss taken by the lender on a recourse non-purchase loan (i.e. refinance or secondary financing), expires Dec 31, 2012. So when a lender agrees to wipe out debt on a short sale, or loan modification, they’d have the ability to recoup the loss in a court action against the borrower.
The (QM) Qualified Mortgage and QRM (Qualified Residential Mortgage) sections of the Dodd Frank Act are supposed to be written by the regulators by Jan 21, 2013. The QM will establish the baseline standards for a borrower’s ability to pay a mortgage. The QRM requires lenders who originate loans for securitization retain 5 percent of the value of the loans unless they meet prescribed underwriting standards. Consumer groups and industry groups, and some politicians are lobbying for some flexibility in these guidelines, as in their present form, only the households with the strongest credit records, assets, and documented income will qualify for a mortgage.
Unfortunately only about 1/3 of the regulations in Dodd Frank have been finalized. The pace, manner and ambiguity of how the Fed is solidifying the new regulations is leaving the lenders exasperated. Lenders have already tightened guidelines, as the uncertainty of originating a marginal loan, or having one document not meeting the yet to be written requirements will be an issue for them.
The scaling back of the Mortgage Interest Deduction, will definitely be in play in some capacity because of the upcoming Fiscal Cliff. In the good old days, all mortgage interest was deductable. It’s already been scaled back a couple times starting with the Tax Reform Act of 1986. This could take the form of a limitation on total amount of deductions capable of being taken by the tax payer, or another specific limit to the amount of MID.
The Obamacare Real Estate Tax that kicks in Jan 1, 2013 is not a straight sales tax as some in the internet have conveyed, but an additional 3.8% Medicare tax on the capital gain on investment income. It kicks in on households with a combined income of $250K or $200K as an individual. If the real estate meets the criteria as an owner occupied property, it’ll be applicable on the capital gain over the $250K/$500K exclusions.
California Tax on Services. Same as a Sales Tax on Goods. Applicable to escrow, title, real estate agent fees, lender fees, etc. Probably a pass-through to the consumer on every purchase, sale or refinance transaction.
Both Los Angeles City and County have been discussing increasing their Transfer or Documentary Stamps. This is a basically a sales tax whenever you sell a property in Los Angeles. Presently the tax is $1.10 per thousand for the county, and $4.50 per thousand for the city. This is already much higher than the adjacent cities & counties. Some parties in the legislature and talking about doubling the tax. This tax is based on the gross sales price, and nothing to do with a capital gain. As an example, presently a $500K sale at the combined $5.60 tax is $2800.
Eventually there may be a potential elimination or scaling back of California’s Proposition 13, the real estate annual property tax system. Presently properties are assessed at 1% of purchase price (tax is closer to 1 1/4% including supplemental bond additions). Limited to 2% increase per year. What’s being discussed is total elimination, with a new assessment for every property every year. Eliminating the system on only non-owner occupied properties (commercial, rental, 2nd homes). The politicians may stick in an extra deduction for the elderly, so not to alienate them during a voting process. Governor Brown never liked Prop 13, even when it was voted in, in 1978.
We may lose some tax incentives of real estate ownership, when at the same time we do have historically low interest rates, property values and rents have been going up, and do we have to put a roof over our heads.