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With all the confusion regarding real estate tax changes and new tax law ( The Tax Cuts and Jobs Act), I wanted to list some of the ways the new laws will affect us with regards to real estate tax changes.
These individual provisions are generally effective after December 31, 2017 for the 2018 tax filing year and expire on December 31, 2025.*Not all are real estate tax changes but are worth noting for most taxpayers as they will affect your bottom line.
REAL ESTATE TAX CHANGES
With regards to exclusion of gain on the sale of a personal property, the final bill retains current law.
Current law maximum rates on capital gains remain the same.
15% maximum rate but 20% for those in the highest tax bracket; 25% rate on “recapture” of depreciation from real property
MORTGAGE INTEREST DEDUCTION
Primary Residence: final bill reduces the limit on deductible mortgage debt to $750,000 for new loans taken out after 12/14/17.
Second Homes: Interest remains deductible on second homes, but subject to the $1 million / $750,000 limits.
Refinancing: Homeowners may refinance mortgage debts existing on 12/14/17 up to $1 million and still deduct the interest, so long as the new loan does not exceed the amount of the mortgage being refinanced.
Home Equity Loans: The final bill repeals the deduction for interest paid on home equity debt through 12/31/25. Interest is still deductible on home equity loans (or second mortgages) if the proceeds are used to substantially improve the residence.
1031 EXCHANGE ( LIKE -KIND EXCHANGE OF REAL PROPERTY)
The current Section 1031 Like Kind Exchange rules for real property remain. It repeals the use of Section 1031 for personal property, such as art work, auto
fleets, heavy equipment, etc.
STATE AND LOCAL TAXES DEDUCTION
A $10,000 itemized deduction is allowed for the total of state and local taxes. This limit applies for both single and married filers.
The Standard deduction was increased to $12,000 for single individuals to $24,000 for joint returns.
The increase of the standard deduction increases the deduction for both renters and homeowners alike. This is also viewed as reducing the value of the mortgage interest and property tax deductions as tax incentives for homeownership.
These have been repealed. Filers can no longer deduct $4,150 in 2018 for the filer and his or her spouse, if any, and for each dependent.
TAX RATE REDUCTIONS
There are slightly lower tax rates for all individual filers.
Tax rate schedule retains seven brackets with lower marginal rates of:
10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Moving expenses are repealed, except for members of the Armed Forces.
These are just some of the provisions in the new law when considering real estate tax changes. Lawmakers have said they will continue to fine tune elements of this new law in the coming year. Stay tuned for real estate tax changes and updates as we go into 2018.
I am a real estate professional and am not an accountant or CPA, so please consult your local professional for a more detailed explanation of how these tax changes can affect your personal situation.
*Data taken from NAR analysis of The Tax Cuts and Jobs Act. More detail can be reviewed by visiting https://www.nar.realtor/tax-reform/the-tax-cuts-and-jobs-act-what-it-means-for-homeowners-and-real-estate-professionals
Jesse Madison, Broker
Orange County, CA