April 15 is just around the corner, but this year’s Tax Day is different compared to many others. That’s because this is the first time taxpayers will file their taxes using the new rules from Congress’ tax overhaul.
The Tax Cuts and Jobs Act of 2017 reformed many parts of the U.S. tax code, including several areas related to real estate. Here’s a summary of how the tax law affects many popular real estate tax provisions:
Standard interest deduction
Congress essentially doubled the standard deduction from $6,350 to $12,000 for single filers and from $12,700 to $24,000 for those filing jointly.
While that’s good news for some taxpayers, it does mean fewer people will itemize their returns, thus being unable to use popular tax deductions for mortgage interest and property taxes.
Mortgage interest deduction
The mortgage interest deduction has been in the tax code since 1913. To incentivize homeownership, those who borrow money to purchase a house may deduct the interest paid on their loan, provided they itemize their taxes.
While the mortgage interest deduction remains after tax reform, there are some notable changes.
Previously, the deduction was limited to $1 million in mortgage debt. Under tax reform, Congress lowered the cap to $750,000. That means if you borrow $800,000 to purchase a home, only the first $750,000 is deductible. However, loans taken out prior to Dec. 16, 2017, can still use the $1 million cap.
While this will affect some buyers, there are many who won’t notice the modification. This is particularly true in Northern Utah where home prices are significantly less than the cap. For example, the median sales price is $230,000 in Weber County, $315,000 in Davis County and $427,075 in Morgan County. Homeowners in high-cost areas where prices exceed $750,000 will feel this change the most.
Homeowners can still deduct the interest paid on a second home up to the $750,000 limit for both homes combined.
Home equity loans
Under tax reform, homeowners can no longer deduct the interest on all home equity loans. However, the interest for a home equity loan is deductible when the loan proceeds are used to substantially improve the residence.
State and local taxes
A big tax reform change is the new cap on state and local taxes. Previously, taxpayers could deduct the total amounts paid for state and local taxes, including property taxes. The new law caps this deduction to $10,000.
Taxpayers living in high-tax states will feel this change the most.
Capital gains exclusion
This part of the tax code did not change. Single homeowners can sell a home and exclude up to $250,000 of the gain from their income provided they have lived in the home for two out of the past five years. This increases to $500,000 for married homeowners filing jointly.
The ability to sell a home without having to pay taxes on the gain is a significant homeownership tax benefit that was retained during tax reform.
Moving expenses
Previously, taxpayers could deduct their expenses for moving under certain circumstances. Under tax reform, this deduction now only applies to members of the Armed Forces on active duty.
Deductions for real estate investors
For real estate investors, the tax code retains the provision for 1031 exchanges for real property. This allows a real estate investor to sell a property and delay the payment of taxes on the gain, provided they invest the money into another similar property.
It’s also important to note that the limits on the mortgage interest deduction and state and local taxes do not apply to landlords of rental property. Business expenses remain fully deductible.
While Congress made significant changes to the tax code, they did retain important homeownership incentives. To learn more about how tax reform affects you, talk to your tax professional. For more information about homeownership and real estate investing, talk to a local Realtor. Find a directory of Northern Wasatch Realtors at NWAOR.com.
Robert Bolar
2019 President, Northern Wasatch Association of REALTORS