If you haven't heard the word on the street these days...the tax code just had a MAJOR reform that will effect everyone. And I mean everyone. But for today, I'm just going to talk about everything that pertains particularly to real estate. So let's get started.
Capital Gains Tax
Prior to the recent tax bill, the rule of thumb with capital gains on a primary residence was as long as you lived in the home for two of the last five years you could use a primary residence exemption and a single person could have an exemption of up to $250,000, while a married couple could have a deduction of $500,000. There was a lot of talk about removing this in Congress but in the end this piece remained exactly the same. So if you plan on renting your home after it has been your primary residence make sure you are aware that you have a chance to take those gains tax free for the following three years ONLY. After that the exemption goes away.
Mortgage Interest Deduction
Prior to the tax reform bill of 2017 a homeowner could deduct the interest on their loan of up to $1,000,000 for their primary residence. Going forward all loans from 2017 and prior are still eligible for this deduction while all new mortgages written in 2018 and going forward will be subject to a cap of $750,000.
If you are deducting the interest on a 2nd home that is still at $1,000,000, then going forward if you buy a second home that cap will be $750,000. However, ff you are deducting the interest on an investment property there might be a better way to deduct on that interest property. See the section below on lower corporate taxes.
Standard Deduction
There is some good news when it comes to the standard deduction. Currently, the standard deduction is $6,350 for a single plus one personal exemption of $4,050. In the new law the deduction for a single individual is $12,000 and $24,000 for a married couple. In the old law, you also saw a credit of $1,000 per child, this has gone up to $2,000 per child. So depending on how much you itemized in the past this might be a slight change but chances are this one won't effect you negatively.
Moving Expense Deductions
Prior to the tax reform bill tax payers who moved as a result of a job change (the move had to be 50 miles or greater) could deduct all of those moving costs. Moving forward this is eliminated for everyone except military personnel.
Home Equity Lines of Credit
Prior to the tax reform bill of 2017 homeowners could deduct up to $100,000 in interest from their home equity line of credit on their primary residence. This unfortunately has been taken away and there is NO GRANDFATHERING. So if you wrote off this interest in the past plan accordingly moving forward as this is no longer an option.
Cap on State and Local Property Tax Write-offs
This area has changed pretty substantially for some folks, so be sure to check how this will effect you going forward. Right now, federally in most cases, you can deduct what you pay in state and local income taxes as well as property taxes. Going forward this is capped at $10,000 period. For homeowners in some states where home prices are less then ours (thus making property taxes much lower) this might not effect them as much, but for us here in Orange County, California property taxes are usually a pretty large number. So moving forward this is an area that will most likely effect us negatively. I know it will be worse for me
Lower Corporate Taxes
While this won't apply to most homeowners some individuals hold their real estate holdings in an LLC or S-corporation. The change here is that before the income passes through to you as an individual there is now a 20 deduction. So depending on your holdings it might make sense for you to put them all in an S-corp this year. Make sure to talk to you accountant on this one.
Conclusion
Depending on your individual scenario, at the end of the day the new tax law might help you or hurt you it really depends on your situation. The one thing I can say for sure is that a lot has changed, but when it comes to real estate most of the deductions remain. If you have any questions always feel free to reach out and contact me. I'm just a phone call or an email away
Get Coastal
-David
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