Understand How The New Tax Law Impacts Your Real Estate
Major Provisions Affecting Current and Prospective Homeowners (Part 1 of the Saga)
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As we now know, there’s a new tax law. Taxes affect something everyone cares about: money. The National Association of Realtors (NAR) has tried to improve and retain as many of the current benefits for homeowners and real estate investment. This means that they needed to convince the government to let us keep as much money as possible with this new bill. So, before you purchase a new home, read ahead to know how it’ll affect your taxes. But, the new law is a long read, and so we’re splitting the explanation into a series. Part 1 is the effect that the bill will have on current and prospective homeowners. As a result of the NAR’s efforts, this is what we got to talk about:
- Tax Rate Reductions
- Exclusion of Gain on Sale of a Principal Residence
- Mortgage Interest Deductions
- Deduction for State and Local Taxes
- Standard Deduction
- Repeal of Personal Exemption
- Mortgage Credit Certificate
- Deduction for Medical Expenses
- Child Credit
- Student Loan Interest
- Deduction for Casualty Losses
- Moving Expenses
Tax Rate Reductions
Good news! Most of us have lower tax rates. The 10% income tax bracket and the 35% income tax bracket stayed the same, but the rest of the tax brackets’ overall reductions mean that Americans will overall pay $1.2 trillion less taxes over the next ten years. However, the maximum tax rates on net capital gains don’t change. Capital gains essentially are when assets like investments, stocks, and real estate sell at higher prices than their purchase price.
Exclusion of Gain on Sale of a Principal Residence
You still need to live in your home for at least 2 out of the past 5 years to qualify for capital gains exclusion. So, if you make sure not to relocate for more than 3 years out of the 5 and also not take any 3 year vacations, then you should be good.
Mortgage Interest Deduction
The deductible mortgage debt has fallen to $750,000 for loans taken out after 12/14/17. All loans up to $1 million before 12/14/17 keep the old bill’s deductible limit. Thankfully, the bill passed with second homes subject to the same rules as first homes; the $1 million/$750,000 limits are applicable, depending on when the loans for the homes were established, but you still have to pay interest.
Homeowners could refinance mortgage debts up to $1 million if the loans already existed on 12/14/17, but the loan can’t be more than the mortgage being refinanced. Refinancing an asset means to revise a payment schedule for paying back debt, such as the frequency and minimum amount needed for each payment. Since the deductible has changed, you should take into account how that’ll affect your payments.
Nice things we can’t have anymore: deductions for interest paid on home equity debt up to 12/31/25. However, interest is still deductible on home equity loans so long as you’re using the money to make major renovations.
Deduction for State and Local Taxes
You can receive a deduction of up to $10,000 for state and local property taxes and for income or sales taxes. The limit is the same, whether you’ve got a ring on your finger or not. Keep in mind that the limit hasn’t even considered inflation. At the least, we should be thankful that the House and Senate didn’t completely eliminate the state and local property tax deduction like they were thinking of doing.
The standard deduction has doubled, which means a $12,000 deduction for single individuals and $24,000 for couples. No need to pull out a calculator for this one--these numbers are indexed for inflation. However, even though Congress lowered mortgage interest and property tax deductions, the raised standard deduction means that only 5-8% of individuals will be able to itemize the same deductions, which means there will be no tax differential between renting and owning for most taxpayers.
Repeal of Personal Exemptions
Error 404: Sorry, personal exemptions don’t exist anymore. Before, tax filers could deduct $4,150 from their total payments, but not anymore.
Mortgage Credit Certificates (MCCs)
If you didn’t already know, Mortgage Credit Certificates turn some of your paid mortgage interest into non-refundable tax credits--so you should want them. The new tax law still allows them, so be sure to take advantage.
Deduction for Medical Expenses
Before, everyone under 65 years old needed unreimbursed medical expenses to take at least 10% of their income before they qualified for medical expenses deduction. However, the 10% floor has dropped to 7.5% for everybody! It’s scheduled to revert back to 10%, but for now, those with heavy enough medical expenses could find a little more relief.
It’s a good time for people with kids. The child tax credit has been raised to $2,000 from $1,000 for ages 16 and younger. Not only that, but the income phase-out has been raised to $500,000 for all filers. In case you’re curious, that’s way more than the original $55,000 single or $110,000 married salary you needed to have in the past.
Student Loan Interest Deduction
If you still have your toes deep in student debt, you’ll be happy to hear that the new bill is keeping the student loan deductible up to $2,500, though it’s subject to income phase-outs.
Deduction for Casualty Losses
Say your life was wrecked by a presidentially-declared disaster. Okay, casualty loss deductible given. But, anything from a major-but-not-terrible enough storm to a mildly leaky roof isn’t going to cut it. Because the bill still includes deductibles for those affected by the largest disasters, that’s better than the other option, which would’ve been to eliminate the deduction entirely unless under special circumstances.
Moving expense deduction? What deduction? You might not want to relocate soon, since moving expense deduction and exclusion don’t exist. Unless you’re part of the military, in which case--yes! Moving expense deductions! I remember those now and you still have them. Unfortunately, everyone else who needs a major relocation won’t have the luxury of a deduction.
So, if you’re a current or prospective homeowner, consider yourself informed. In fact, if you feel so informed that you’re ready to buy a house (because you don’t have one or--hey, you can have two if you want), HER can help. For those curious about how the new law will affect commercial real estate and real estate professionals, stay tuned for the next part of the saga!