The National Association of Realtors has help deciminate the new tax law and how it affects home ownership and real estate professionals. The following blog was based on information from the article. For the full article, go to:
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 was signed into law. Beginning in 2018, it cuts the corporate tax rate from 35 percent to 21 percent. The top individual tax rate will drop to from 39.5 percent to 37 percent. It cuts income tax rates, doubles the standard deduction, eliminates or limits many itemized deductions, and eliminates personal exemptions. The corporate cuts are permanent, while the individual changes expire at the end of 2025.
How does the new law affect home ownership? The following is based on the preliminary review/interpretation of the new tax law by the National Association of Realtors. If you have specific questions about the new law and its impact, please reach out to a tax advisor. Changes will affect 2018 tax returns.
The biggest tax advantage of owning a home is the mortgage interest and property taxes you pay are deductible on your Federal Tax Return. This was on the chopping block and hotly debated with the proposed tax reform. The National Association of Home Builders and the National Association of Realtors opposed any limits on deducting mortgage interest and property taxes fearing it would discourage home ownership and ultimately cause housing prices to fall.
Mortgage Interest Deduction
Under the new law, there was a compromise. The deduction is limited to the mortgage interest on the first $750,000 of a home loan and only applies to mortgages taken out after December 14, 2017. The limit was previously set on the mortgage interest for the first $1 million of a home loan. The cap for the mortgage interest deduction on second homes also dropped for the first $1 million to the first $750,000 of the home loan.
Interest paid on amounts up to $100,000 in home equity loan debt (previously capped at $100,000) is no longer deductible unless the proceeds are used to substantially improve the property.
The House-passed bill would have capped the mortgage interest limit at $500,000 loans and eliminated the deduction for mortgage interest on second homes.
State and Local Tax Deductions
The new law also impacts state and local tax deductions. While the previous law allowed for unlimited itemized deductions, the total of your property tax, state and local income tax, and/or sales tax deductions is now capped at $10,000. If you live in an area with high local taxes, this could have a significant impact on what you will owe.
Because of the changes, it is estimated that 94 percent of taxpayers will now take the standard deduction instead of itemizing. The new tax plan doubles the standard deduction. A single filer's deduction increases from $6,350 to $12,000. While the deduction for Married and Joint Filers increases from $12,700 to $24,000. It reverts back to the current level in 2026. As more taxpayers take a standard deduction, fewer would take advantage of the mortgage interest deduction.
When House and Senate bills were first introduced, the deduction for state and local taxes would have been completely eliminated. The House and Senate passed bills would have allowed property taxes to be deducted up to $10,000. The final bill, while less beneficial than current law, represents a significant improvement over the original proposals.
Capital Gains Tax
The government still allows you to make a profit on the sale of your home up to $250,000 if you are single and $500,000 if you are married. As long as the home was your Primary Residence, you will not owe taxes on that capital gain.
The Senate-passed bill would have changed the amount of time a homeowner must live in their home to qualify for the capital gains exclusion from 2 out of the past 5 years to 5 out of the past 8 years. The House bill would have made this same change as well as phased out the exclusion for taxpayers with incomes above $250,000 if single and $500,000 if married.
Section 1031 Exchanges
The final bill retains the current Section 1031 Like Kind Exchange rules for real property. It repeals the use of Section 1031 for personal property, such as art work, auto fleets, heavy equipment, etc.
The exclusion of real estate from the repeal of 1031 like-kind exchanges is very significant for real estate investors.
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