Tax Reform and Home Ownership
Back in the late fall when the U.S. House and Senate were putting forth their versions of tax reform it was looking like proposed changes would mostly benefit big business, and hurt homeowners. Property tax deductions and the ability to take a mortgage interest deduction were going to be significantly impacted. And the capital gains exclusion was likely to be much harder to achieve. Just before Congress adjourned for the December holidays, the Tax Cuts and Jobs Act was signed into law.
The Broker's Notebook
Now that the bill is law what can homeowners expect?
Buy Versus Rent
The doubling of the standard deduction, in essence, removes a tax incentive for moving from renting, to home ownership. According to Moody’s Analytics, an economic research firm, as many as 38 million Americans who would otherwise itemize may instead choose the higher standard deduction under the new tax plan. Across the country a likely outcome will be fewer Americans will opt for ownership over renting based on the tax advantages which could influence property values in certain parts of the country. I believe many will still want to own for advantages other than tax advantages, e.g. the permanence and investment aspect, and that our market will not see property values affected by this.
A huge benefit of home ownership is being able to exclude a significant portion of the gain when selling. IRS Section 121, as we know it today has been in effect since 1997. If you have lived in your home 2 of last 5 years, singles can exclude $250,000 and married filing jointly can exclude $500,000 of gain. The exclusion is available once every two years and there is no limit to how many times you can take it. Congress almost changed this significantly, but didn’t. For many Americans for whom equity in their home is a significant portion of their retirement this is one of the more important provisions from previous tax law that did not change.
The new tax law preserves the deduction of mortgage debt used to acquire a second home. This should support property values in resort and vacation destinations such as ours. (In a future article I will address rules vis a vis turning a rental property into a primary residence so that its gain can also be excluded under Section 121.)
The following is a summary of the NAR’s recent “issue brief” on tax reform:
Exclusion of Gain on Sale – Principle Residence
The proposed 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 final bill retains current law and maximum rates, a significant victory that NAR is credited with achieving.
Mortgage Interest Deduction The final bill reduces the limit on deductible mortgage debt to $750,000 for new loans taken out after 12/14/17. Current loans of up to $1 million are grandfathered and are not subject to the new $750,000 cap. 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. 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. Interest remains deductible on second homes, but subject to the $1 million / $750,000 limits.
Deduction for State and Local Taxes The final bill allows an itemized deduction of up to $10,000 for the total of state and local property taxes and income or sales taxes. Previously homeowners could deduct all taxes paid.
Standard Deduction By doubling the standard deduction, Congress has greatly reduced the value of the mortgage interest and property tax deductions as tax incentives for homeownership.
Like-Kind Exchanges NAR efforts helped preserve the like-kind exchange for real property. 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.
Cost Recovery (Depreciation) – Investment Property The final bill retains the current recovery periods for nonresidential real property (39 years), residential rental property (27.5 years) and qualified improvements (15 years).
Rehabilitation Credit – Historic Tax Credit The final bill repeals the current-law 10% credit for pre-1936 buildings, but retains the current 20% credit for certified historic structures (but modified so the credit is allowable over a 5-year period based on a ratable share (20%) each year). Other Noteworthy Changes
Other Noteworthy Changes
Repeal of Personal Exemptions Under the prior law, tax filers could deduct $4,150 in 2018 for the filer and his or her spouse, if any, and for each dependent. These exemptions have been repealed in the new law. This change alone greatly mitigates (and in some cases entirely eliminates) the positive aspects of the higher standard deduction.
Deduction for Medical Expenses The final bill retains the deduction for medical expenses (including decreasing the 10% floor to 7.5% floor for 2018).
Child Credit The final bill increases the child tax credit to $2,000 from $1,000 and keeps the age limit at 16 and younger. The income phase-out to claim the child credit was increased significantly from ($55,000 single/$110,000 married) under current law to $500,000 for all filers in the final bill.
Student Loan Interest Deduction The final bill retains current law, allowing deductibility of student loan debt up to $2,500, subject to income phase-outs.
Deduction for Casualty Losses The final bill provides a deduction only if a loss is attributable to a presidentially-declared disaster.
Moving Expenses The final bill repeals moving expense deduction and exclusion, except for members of the Armed Forces.
Qualified Private Activity Bonds The final bill retains the deductibility of qualified private activity bonds used in constructing affordable housing, local transportation and infrastructure projects and for state and local mortgage bond programs.
Tom Ward, Realtor
CLA, CSA, CRS, e-Pro, GRI, SRS
Full-time agent with Jess Reid | Christie’s Real Estate since 1994, serving Park City locals. “I have a passion for the art and science of home resales and a track record for delivering results that move you. Don’t hesitate to call or email me for information regarding the selling process. It’s never too early to start preparing for a sale!