Tax Cuts and Jobs Act: Effects on Real Estate

On December 22, 2017, President Trump signed into law the first major tax overhaul since Ronald Reagan was president. That was in 1986. As provisions of the bill trickled into public consciousness, some homeowners rushed to prepay property taxes that they feared would not be deductible in 2018.

Tax Day with its consequences for 2017 has passed and it’s time for tax filers–and tax preparers–to plan for the effects of the Tax Cuts and Jobs Act, or TCJA, in 2018. Questions abound; should I buy a house? Should I use my equity line of credit?

SALT
The state and local tax deduction, or SALT, remains for tax itemizers, but a cap of $10,000 was placed on it, or $5,000 for married filing separately. This replaces the previously unlimited deduction that included income and sales taxes. Homeowners in states and municipalities that impose higher property taxes, as well as those who own homes with high assessed values, could face higher income taxes.

Under alternative minimum tax rules, itemized deductions for personal state and local property taxes are disallowed. That’s also true for itemized deductions for personal state and local income taxes; there’s been no change in this rule.

Speculation exists that the deduction could be higher if you own a home that’s used partially for business, such as if you have a deductible office in the home or it’s partially rented out. It’s suggested that property taxes allocable to these uses over the limit could be deductible. Time and the next tax season will tell; consult your tax professional.

Mortgage Interest Deduction
The cap on the mortgage interest was dropped for 2018 through 2025. Homeowners who signed up for a new mortgage on a first or second home after December 14, 2017, are allowed to deduct only the interest on debt up to $750,000, a decrease of $250,000 from 2017’s cap. Homeowners who have a mortgage taken out before that date will not be affected. Homeowners will be able to refinance mortgage debts that existed before December 14, 2017, and deduct the interest as long as the new loan does not exceed the amount refinanced. Mortgage interest on second homes is deductible if the mortgage doesn’t exceed the $750,000 limit. Realtors suggest the cap is likely to affect people looking for homes in more expensive coastal or resort regions and in states with higher property taxes.

In previous years, interest on a home equity loan up to $100,000 was deductible. In 2018, that deduction disappears. However, the interest on a HELOC could be deductible as long as the proceeds were used to substantially improve the home. Some grandfathering principles apply on debt incurred prior to January 1, 2018, so consult your tax advisor on your individual situation.

Capital Gains
Homeowners who sell a home for a gain, considered a long-term capital gain, are still able to exclude up to $500,000 or $250,000 for single filers. The caveat in the TCJA is that they must be selling their primary home and must have lived there for two of the last five years.

Disaster Deduction
Until now, losses due to fire, storm, shipwreck or theft that weren’t covered by insurance were deductible if they exceeded 10 percent of adjusted gross income. Under TCJA and until 2025, the deduction can be claimed only if the loss occurred during an officially declared national disaster. For example, people affected by losses from the California wildfires and mudslides or Hurricane Nate are potentially eligible for relief, but a survivor of a home fire would not be.

Standard Deduction
With the standard deduction increased to $12,000 for single filers and $24,000 for joint filers, it may no longer make sense for many homeowners to itemize deductions. Today, about 44 percent of American homes are worth enough to justify the deductions, and according to an analysis of the TCJA by Zillow, that number could decrease to 14 percent. Samantha Sharf of forbes.com notes that it’s estimated that 95 percent of taxpayers will claim the standard deduction rather than itemize.

However, with the doubling of the standard deduction, the American dream of home ownership is still within reach. In the long run, first-time homebuyers may come out ahead. “The mortgage interest deduction change will put downward pressure on prices as well as sales,” said Joe Kirchner, senior economist at Realtor.com. In other words, today may be a better time than ever to move into home ownership.

As of this writing, questions still exist and each tax filer’s situation is unique. The universal advice is, don’t procrastinate. Hopefully you have already had this conversation with your tax preparer and you will find yourself on the positive side of the scale on April 15, 2019. But you still won’t be able to file your return on a post card. ■

Sources: Cnn.money.com, chicagotribune.com, forbes.com, marketwatch.com and nytimes.com.