With the passage of the tax reform bill, many are wondering whether Congress has preserved traditional home-buying incentives. While lawmakers have kept many of the most attractive homeownership benefits, they have made some alterations.
This article takes a look at some of the most significant tax issues related to real estate in the newly enacted law.
Capital Gains Exclusion on Principal Residence
The new tax law keeps the provisions of the prior tax law in regard to the tax treatment of capital gains. For homeowners who have lived in their home as a primary residence for two of the past five years, they are allowed to keep the gain on the sale tax-free up to $500,000 dollars for married filers and $250,000 for single filers.
Mortgage Interest Deduction
The deductibility of mortgage interest remains intact, although Congress has made some alterations.
Homeowners may continue to deduct mortgage interest for a primary and secondary residence for up to $750,000 in mortgage debt. This is down from a limit of $1 million historically but higher than the $500,000 that House lawmakers previously proposed.
The change will hurt homeowners the most in expensive areas such as California, which has a median home price of $546,820 statewide and $910,350 in San Francisco.
Conversely, in Northern Utah, where the median home prices are $216,250 for Weber County, $266,500 for Davis County and $448,500 for Morgan County, the change is less likely to hurt homebuyers.
The lower cap on mortgage debt applies to loans originated after Dec. 14, 2017. For loans secured prior to the deadline, taxpayers may continue to deduct up to $1 million in mortgage debt. This applies even if homeowners refinance, provided that the new loan does not exceed the mortgage amount.
Keep in mind, however, that the mortgage interest deduction is only available to taxpayers who itemize. Because Congress has doubled the standard deduction, it is likely that fewer people will take advantage of the mortgage interest deduction simply because they will take the standard deduction rather than itemizing their taxes.
Home Equity Loans
While purchase and refinance loans retain existing elements, home equity loans change more. In particular, homeowners will no longer be allowed to deduct the interest on home equity loans. This was previously allowed up to $100,000.
If, however, the debt is used to substantially improve the home, the interest remains tax-deductible. Again, the homeowner must itemize to take this deduction.
State and Local Taxes
Historically, homeowners could fully deduct the amount paid for most state and local taxes, including property taxes. The popular deduction found itself in jeopardy during tax reform debates with some lawmakers proposing its complete elimination. The final bill, however, preserved this tax provision as an itemized deduction of up to $10,000 for property and income taxes or property and sales taxes.
As with other facets of the new tax law, the change will have the most detrimental effect on taxpayers who live in high-tax areas where taxes may exceed the $10,000 limit.
The 1031 exchange is a popular provision that real estate investors use. It allows an investor to sell a property and replace it with another like-kind property and defer taxes on any gain from the sale.
While the rules will remain the same for real estate, the new tax law now excludes personal property from the use of 1031 exchanges.
While many of the provisions in the new tax law are similar to the previous version, there are important changes to know and understand. Homeowners and homebuyers should talk to a tax professional as they determine what real estate strategies make the most sense for them in the new environment.
To learn more about buying or selling a property in Northern Utah, contact a local Realtor. Find one at NWAOR.com.
Brenda Nelson is president of the Northern Wasatch Association of Realtors.