First of all I want to make it clear that this blog is intentionally working to be nonpolitical and non-partisan. We're just going to directly state the changes to the current tax policy, how they are projected to affect the average home owner or buyer and of course those of us in the Real Estate profession. And while countless Americans will be impacted by the new laws, both for better and for worse, homeowners in particular will see a number of key changes take effect in the very near future. If you own property, here's what you can expect.
At the bottom of the page is a little more detail on three of the most important changes and how they affect Real Estate Transactions and Buyers and Sellers:
Increased standard deduction: The standard deduction would nearly double, to $12,000 for single filers and $24,000 for joint filers. (If you have a fairly small mortgage, you’ll likely now be using the standard deduction rather than Itemizing on Schedule A.)
Mortgage interest deduction: Individuals would be allowed to deduct interest paid on new mortgages (issued after Jan. 1, 2018) of up to $750,000. That’s down from the current cap of $1 million. The deduction would also apply to second homes, but not for home equity lines of credit.
State and local tax deduction: Taxpayers would be allowed to deduct up to $10,000 in a combination of property tax and income tax (or sales tax).
The capital gains exclusion for the first $250,000 ($500,000 if married) profit from a primary residence sale if you’ve lived there 2 of the past five years; and the 1031 like kind exchange for real property capital gains deferral have been preserved. (Lobbyists successfully saved these)
New individual tax rates: The bill sets seven individual brackets at 10%, 12%, 22%, 24%, 32%, 35% and 37%. The new 37% top rate would apply to taxable income in excess of $500,000 for single filers and $600,000 for joint filers.
Increased child tax credit: The per-child tax credit would double from $1,000 to $2,000.
Increased exemption for Alternative Minimum Tax (AMT): The AMT would be retained for individuals, but the exemption and phase-out amounts have sharply increased.
No changes to capital gains and dividends: Capital gains & qualified dividends will continue to be taxed at the current 0%, 15% & 20% rates, depending on income. Wealthier filers will continue to pay an additional 3.8% tax on investment income (Net Investment Income Tax).
Estate tax exemption doubled: Estates of up to $11 million (or $22 million for couples) would be exempt from taxation.
Numerous other deductions and tax credits repealed: The bill repeals deductions for tax preparation, moving expenses and alimony payments, among others.
Repeals the requirement set by the Affordable Care Act that individuals purchase health insurance or pay a penalty, beginning in 2019.
Preserves deduction for medical expenses: Medical expenses above 7.5% of adjusted gross income would be deductible in 2017 and 2018. In 2019 rising to 10%.
No changes to cost-basis rules: Investors will continue to have the ability to choose which lots of stock they are selling. (no requirement for FIFO method)
Expansion of 529 college savings accounts: Up to $10,000 per year of money in a 529 college savings plan can be used to pay for K-12 school tuition or homeschooling.
No major changes to retirement savings accounts: Contribution limits to IRAs, Roth IRAs, 401(k)s and other retirement plans were not changed.
Reduction in taxes for “pass-through” businesses: The bill significantly reduces the effective rate of tax on business income earned by independent contractors and income received from pass-through entities. This change will lower the taxes of many real estate professionals.
Below is a little more detail on three of the most important changes and how they affect Real Estate Transactions and Buyers and Sellers:
The mortgage interest deduction will be limited to $750,000 loans
The mortgage interest deduction has long been a huge money-saver for homeowners, and it still will be, but to a lesser extent. While homeowners could, up until now, deduct interest on a home loan of up to $1 million, that cap will be lowered to $750,000 come 2018. Now if you have an existing mortgage, you don't need to worry about this change, but if you're applying for a new home loan in 2018, you should know about the impending cap.
One thing to note about this reduction, however, is that it's not all that bad in the grand scheme of what could've been. Legislators have long been campaigning to eliminate or slash the mortgage interest deduction since it's been said to grossly favor the rich. And to some extent, that's true.
Remember, the value of a tax deduction lies in your effective tax rate. The higher your rate, the more valuable a deduction becomes. So in this regard, one can argue that the wealthy derive greater benefits from all deductions, not just the mortgage interest deduction. However, since those with more money are also the most likely to swing higher mortgages, it's been said that this particular deduction is notably skewed. However, in some areas of the country, middle earners have no choice but to stretch their budgets to buy properties at inflated prices -- so it's not just the rich who could lose out with this cap.
Interest on home equity loans will no longer be deductible
Home equity loans have long served as a key source of financing for homeowners, and up until now, homeowners could deduct interest on loans worth up to $100,000. Under the new tax changes, however, this provision is going away and home equity loan interest will no longer be deductible at all. Furthermore, whereas homeowners with existing mortgages are grandfathered into the old laws, home equity loan holders don't get that same leeway. This means that if you have a home equity loan and were counting on writing off its interest next year, you'd better think again.
While some homeowners won't be impacted by the upcoming tax changes, countless Americans do stand to lose out on some key tax-saving opportunities. If you're one of them, then it pays to be strategic about your 2018 taxes and look into other ways to save going forward. This could mean being smart about selling investments or capitalizing on other deductions that won't get altered under the new rules. For better or worse, the tax system is going to change before our eyes, and the best thing you can do as a homeowner is learn to roll with the punches.
The property tax deduction will be capped at $10,000
Homeowners in states with high taxes like New York, New Jersey, and California have, up until now, gotten a bit of a break in the form of the SALT (state and local tax) deduction. Under the current law, you're allowed to write off the total amount you pay in state income and local property taxes, but under the new law, that deduction will be limited to $10,000 total. Given that more than 4 million Americans pay over $10,000 a year in property taxes alone, that's a pretty harsh blow for those whose deductions will be slashed going forward.
There is, however, one thing you can do to ever so slightly ease the pain. If your town allows, you can look into prepaying your 2018 property taxes, or a portion thereof, before 2017 comes to a close. This will allow you to eke out some additional tax savings before the $10,000 SALT cap takes effect. Keep in mind, however, that you can't apply the same strategy to your state income taxes -- the new bill prohibits prepayments there.
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