I don’t know about you, but I’m sure glad the election is over. Now we can focus on what this means. Well, unfortunately, Congress has big issues to deal with before the end of the year that will impact all sorts of taxes and deductions. And, of course, nobody knows what it will do. Hey members of Congress don’t even know what they will do — if anything at all! Since it’s December already, time is quickly running out.
Hardly a day goes by without mention of the Fiscal Cliff, which is comprised of two separate things. One is the expiration of the Bush tax cuts and the other has to do with mandatory federal budget cuts, both scheduled for this Dec. 31.
One thing you should plan on is that taxes will go up. They already have for high-income earners in the state as a result of the passage of Prop 30. The president campaigned on that also.
Below are some things you should think about. The best advice is to carefully monitor the news to see how this unfolds. Make sure your accountant is on speed dial because you won’t have much time to act since Congress won’t resolve this until right before the end of the year.
Capital gains taxes are certainly on the block. They are presently 15 percent. But will they go to 20 or 25 percent, or more? What may be sort of good news is that for all Coastside homeowners who purchased after 2000, there are very little gains to speak of now because prices are relatively flat. But will Congress touch the $250,000 and $500,000 tax-free exemption on home sales? That would be huge. I kind of think this will be spared since so many members of Congress live in expensive areas like East and West Coasts. Such a move would hit their pocketbooks as well.
How about the deductability of interest and property tax deductions? Those probably won’t be eliminated but the maximum deduction may be lowered. Interest deduction on second homes may be touched although that too will hit our elected officials hard since they have multiple residences.
1031 Tax Deferred Exchanges on the sale of investment property haven’t been mentioned. This has been a widely used vehicle for years in order to build wealth on a tax deferred basis. 1031 exchanges can defer the capital gains tax completely if all the money is reinvested in other real estate. Again, this does not apply to primary residences.
The expiration of all these tax breaks has been known to Congress and the White House for more than a year and has been ignored until the eleventh hour and 59th minute. What’s worse is that members of the public will not have the opportunity to see how this will effect them in time to act in their best interests.
If Congress does nothing, allowing the Bush tax cuts to expire, then federal income taxes will go up for everyone and the capital gains taxes will rise from 15 percent to 20 percent. That might end up being less than what’s being kicked around. Should the mandatory budget cuts also take effect due to inaction, they will be equally spread out between defense and the rest of the government. Those cuts could have an indirect effect on real estate in certain regions in that there will be less spending and possible income from government employees and contractors as budgets are tightened. That could trickle down to fewer home sales.
There are so many questions, so little time and so few answers.
Steve Hyman is the broker and owner of Century 21 Sunset Properties. He can be reached at 726-6346 or at www.century21sunset.com