By: Christina Dube
From real estate tax extensions to unversed rent control laws; the federal and state changes that will affect your real estate portfolio.
On December 20th, President Trump signed a massive 1.4 trillion funding package that includes temporary extensions of three important tax provisions that directly impact our industry.
Some of the most relevant expired provisions that are now extended through 2020 include:
1) the exclusion of forgiven mortgage debt from gross income, (owners of primary residences who sold them short and had part of their mortgage debt written off will not have to pay tax on the amount forgiven)
2) the deductibility of premiums for mortgage insurance
3) the deduction of the cost of improvements to commercial buildings that make them energy efficient.
“Confidence and stability are two of the most critical factors impacting America’s housing market and economy. Fortunately, this funding agreement delivers that certainty to NAR’s 1.4 million members and the clients they work hard to serve every day,” said NAR President Vince Malta (Nars.com; Funding Bill with Numerous Wins…)
Big Change to San Diego’s Rental Market
Like many California cities, San Diego has never had rent control. That all changed January 1st, 2020 with the passing of California Civil Code Section 1947.12, which enforces rental increase caps for the entire state. So, what does this mean for landlords and tenants in San Diego?
- Annual rent increase is capped at 5% plus the inflation rate. (San Diego/Carlsbad’s rate is 2.2%) so rent increase for 2020 is limited to 7.2%.*
- Regardless of inflation, rent is capped at 10%. So, if the inflation rate is calculated at 7% next year, rent won’t increase to 12%, because it’s capped at 10%.
- Landlords can’t increase rent more than twice in one year (if they include two 3% increases, they can’t add a third to make up the 1.2% to reach maximum 7.2%).
- If a landlord increased rent after March 2019 to an amount higher than 7.2%, they must reduce the amount on January 1st, 2020, to comply with the 7.2% limit, however, they don’t have to reimburse the tenant the amount that was “over charged”.
- Landlords can raise the rent to market value once a tenant vacates the property.
These changes might sound frightening to tenants in high-rent areas, but market appreciation will still be the guiding factor. According to C2 Financial Corp. real estate analyst Mark Goldman, “The statutory limit might be 7.2 percent, but the market might only be appreciating at 2 or 3 percent per year” he said. “A landlord isn’t going to put in the max (of 7.2 percent) unless they want to expose themselves to empty units.” (Molnar, P. October 25th, 2019, San Diego Will Soon Have Rent Control, SanDiegoUnionTribune.com)
The newness of this law for San Diego will mean a large learning curve for tenants, landlords, real estate attorney and judges. The San Diego Tenants Unions are already pushing to cap the increases to 2% annually. Undoubtedly, changes will be made as points of clarification are needed and unforeseen issues arrive, but for the next decade at least, rent control is here to stay.
EXEMPTIONS AND “JUST CAUSE”
- The new law only applies to rentals that are more than 15 years old. This is a rolling 15 years, so while your 14 year old property may be exempt this year, next year it may not be.
- Single family homes and condominiums are exempt, unless they are owned by a corporation.
- The new law does not just cap rent increases, it also requires “just cause” for evictions, a whole new set of circumstances for property owners.
- Your Real Estate agent can be an amazing resource when it comes to navigating these new restrictions. Call them if you have questions!
*Landlords and tenants alike should understand how the inflation rate is calculated to ensure the maximum amount of rent increase allowed. Inflation rate is calculated using the California Consumer Price Index (CPI) percentage change from March 2018-March 2019. The chart is published on this government website – https://www.dir.ca.gov/oprl/CAPriceIndex.htm.