There is such a crazy amount of misinformation floating about in regards to the new tax law. I wanted to read through it and share with you what I have found in regards to real estate.
Remember that I am NOT a CPA, so make sure you talk to one to get all of your questions answered. I can refer you if you want. Also note that the tax return due in April of this year is for 2017, which falls under the scope of the OLD tax law, so again, stick to your tax professionals for advice. I am just providing information, and my source will be at the end of this email.
Capital Gains on your Primary Residence: One item in particular that was cause for a ton of debate is the tax on the capital gains realized by homeowners when they sell their primary residence. Rumor was that the law was changing. Currently, people who live in their home for a minimum of 2 of the previous 5 years are exempt from capital gains taxes on that equity up to a predetermined limit. The rumor was that the law would change to require a person to live in their primary residence for 5 of the previous 8 years, meaning that people who were selling a home that qualified as their primary residence for between 2 and 6 years were going to be exposed to a tax that they were not exposed to before. THIS IS NOT THE CASE. This was especially relevant to people with open escrows that might not close until after January 1, 2018. So, to be clear the bill will not change the current rules regarding exclusion of gain from the sale of a principal residence.
Moving Expenses: As of January 1, the moving expense deduction is repealed through the year 2025, except for members of the armed forces on active duty who move pursuant to a military order and incident to a permanent change of station. Not only are moving expenses no longer deducible, reimbursement from a company for moving expenses will become taxable income. The act repealed through 2025 the exclusion from gross income and wages for qualified moving expense reimbursements, except in the case of a member of the armed forces on active duty who moves pursuant to a military order.
Property Taxes: Are property taxes still deductible? YES! Another bit of misinformation that is still floating around about the new tax law is that individuals can no longer write of the property tax on their home.
Under the Tax Cuts and Jobs Act, individuals are allowed to deduct up to $10,000 ($5,000 for married taxpayers filing separately) in state and local income or property taxes. This can be used as a combination of any and all of these types of taxes.
Yes, I get that in some parts of the country property taxes are very high, and some people pay more than $10,000 a year in just property taxes alone. This is not the case for everyone though, and saying that the middle class can no longer write off their property taxes is an incorrect statement.
Here is a bit more on the new tax plan – For some reason I see a lot of people STILL claiming that because the standard deduction went up, they can no longer write off interest on their home mortgage. Nothing has changed in that respect; it was always the case that you took one of the two; people took either the standard deduction or they itemized deductions, never both.
What did change is the amount of interest that can be itemized, and it has everything to do with the size of the loan, not even the amount of interest paid. The home mortgage interest deduction was modified to reduce the limit on acquisition indebtedness to $750,000 (from the prior-law limit of $1 million).
Loans already in existence are not affected by the new laws. A taxpayer who entered into a binding written contract before Dec. 15, 2017, to close on the purchase of a principal residence before Jan. 1, 2018, and who purchases that residence before April 1, 2018, will be considered to have incurred acquisition indebtedness prior to Dec. 15, 2017, under this provision, meaning that he or she will be allowed the prior-law $1 million limit.
Considering the vast majority of homebuyers do not have a loan with the initial borrowed amount greater than $750K, this change will have little impact. This law considers the loan only, home price has no bearing. For example, someone buying a $1 million home who puts down $300,000 can still deduct interest, whereas someone buying a $1 million home putting down $50,000 won’t be able to write the mortgage interest off like they used to.
Furthermore, the dollar amount of the interest has no bearing. If one person has a new loan for $700,000 at 5% and the next person has a new loan for $700,000 at 3% (made up interest rates for the sake of example) they will both get to write off their interest in full, regardless of the fact that the interest charged will be substantially different amounts.
This change shouldn’t have much impact, if any, on most of you reading this. Very few homebuyers have mortgages greater than that amount. In fact, the National Low Income Housing Coalition estimates that only 1.9% of mortgage originations from 2013 to 2015 exceeded $750K in value.
This one is a little bit trickier, so if you think you might be impacted in any way, please contact your favorite CPA or tax preparer for more details. IF you qualify for a $750,000 loan or more, I am guessing you probably have one you like already.
HELOC Interest – Although purchase mortgage interest remains unchanged, a Home Equity Line of Credit is considered a consumer loan, not a loan used to buy property in the first place. Home Equity Lines of Credit interest is NO LONGER deductible! The home-equity loan interest deduction was repealed through 2025 under the Tax Cuts and Jobs Act. My suggestion to anyone with a HELOC is to go ahead and refinance your home so that the interest becomes deductible for you again.
Now remember, I am neither a CPA nor a Loan Officer, so you need to talk to professionals, but if you need a reference to either one, I can give you referrals to some really good people who can help you with it.
Please make sure you talk to your CPA or EA in the next few weeks when you are doing your 2017 tax returns. You may be ahead by having a planning discussion for 2018 if you have any questions.