As a real estate broker and attorney, I am frequently asked what tax reform means for my clients. Here is a summary of pertinent changes impacting homeowners, investors, business owners, and those looking to purchase real estate in the future.
Mortgage Interest Deduction
Under the prior law, the mortgage interest deduction was capped at $1,000,000, which means a homeowner could deduct interest for mortgage debt totaling $1,000,000 or less. Under the new law, the mortgage interest deduction is capped at $750,000, meaning a homeowner can now only deduct interest for mortgage debt totaling $750,000 or less. This applies to both primary residences and second homes.
Home Equity Loan Deduction
Under the prior law, interest on home equity loans was deductible for debt totaling $100,000 or less. Under the new law, the deduction remains, but it is only available if the loan is used to substantially improve the property.
State and Local Tax Deductions
Under the prior law, individuals who itemized their taxes (about 1/3 of Americans) could deduct the amount they had paid in state income taxes or state sales tax (but not both), and also property taxes. Under the new law, taxpayers who itemize will be able to deduct their state income, sales, and property taxes, up to a total limit of $10,000.
Capital Gains Exemption on Sale of Primary Residence
Under the prior law, an exclusion of $250,000 (if single) or $500,000 (if married) was available for the gain realized on the sale or exchange of a primary residence, if it had been lived in for 2 of the last 5 years. The new law keeps this exclusion, and does not change it.
1031 “Like Kind” Exchanges
Under the prior law, 1031 exchanges (which allow property owners to avoid paying taxes on the sale of property when the proceeds are immediately re-invested in “like kind” property) could be accomplished for all classes of property, including personal property and real property. Under the new law, personal property exchanges are repealed, and 1031 exchanges can now only be used on real property.
Under the prior law, personal exemptions were provided to taxpayers up to a certain income bracket. Under the new law, personal exemptions are eliminated.
Under the prior law, the standard deduction for individuals was $6,350, and the standard deduction for married couples was $12,700. Under the new law, the standard deduction nearly doubles. For individuals it is $12,000, and for married couples it is now $24,000.
Moving Expenses Deduction
Under the prior law, moving expenses incurred in connection with a job change under certain circumstances were deductible. Under the new law, this deduction is only available to members of the armed forces on active duty who are moving pursuant to military orders.
Child Tax Credit
Under the prior law, the Child Tax Credit available to some taxpayers was $1000 per qualifying child. Under the new law, the credit is worth $2000 per qualifying child.
Deduction for Qualified Business Income of Pass-Through Entities (Including Independent Contractors)
Significantly, the new law provides a 20% deduction of taxable income for qualifying business owners (including independent contractors), which phases out above $157,000 (if single), or $315,000 (if married). This deduction did not exist under prior law.
This article contains general legal information and should not be construed to form an attorney-client relationship or contain specific legal advice. For tax advice specific to your circumstances, please contact your legal or tax professional.