San Diego Real Estate Market

January 2018 News

Tax Reform Highlights

The tax code hasn't been thoroughly reformed since 1986, but the new Tax Cuts and Jobs Act impacts every facet of real estate. We'll touch on some of the key highlights here.

The advocacy of National Association of Realtors' (NAR) members, and consumers, bore fruit. The legislation will benefit many homeowners, homebuyers, real estate investors, and NAR members as a result. Two important wins include the exclusion for capital gains on the sale of a home, and preservation of the like-kind exchange for real property.

Key Takeaways from the Tax Cuts and Jobs Act
 

  • Most individual provisions take effect for the 2018 tax filing year and expire on December 31, 2025. 
  • The new legislation provides generally lower tax rates for individual tax filers. Not everyone will pay lower taxes, but the great majority will. The total size of the tax cut from the rate reductions equals more than $1.2 trillion over ten years. The tax rate schedule retains seven brackets with slightly lower marginal rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
  • The law keeps the  maximum previous rates on net capital gains (generally, 15% maximum rate; 20% for those in the highest tax bracket; 25% rate on “recapture” of depreciation from real property).
  • Exclusion of Gain on Sale of a Principal Residence: The new law keeps current provisions, so to qualify for a capital gains exclusion, homeowners must live in their home 2 out of the past 5 years. The Senate-passed bill proposed a change to 5 out of the past 8 years.
  • Mortgage Interest Deduction: The law reduces the limit on deductible mortgage debt to $750,000 for new loans after 12/14/17. Current loans of up to $1 million are grandfathered in, and are not subject to the new $750,000 cap. 
  • The legislation repeals the deduction for interest paid on home equity debt through 12/31/25. Interest is still deductible on home equity loans (or second mortgages) if the proceeds are used to substantially improve the residence.
  • Deduction for State and Local Taxes: The new tax law allows an itemized deduction of up to $10,000 for the total of state and local property taxes and income or sales taxes. This $10,000 limit applies for both single and married filers.
  • Standard Deduction: Standard deduction will be $12,000 for single individuals and $24,000 for joint returns. By doubling the standard deduction, Congress has greatly reduced the value of the mortgage interest and property tax deductions as tax incentives for homeownership. Congressional estimates indicate that only 5-8% of filers will now be eligible to claim these deductions by itemizing, meaning there will be no tax differential between renting and owning for more than 90% of taxpayers.
  • Child Credit: The final bill increases the child tax credit to $2,000 from $1,000 and keeps the age limit at 16 and younger. The income phase-out to claim the child credit has grown from $55,000 single/$110,000 married under current law to $500,000 for all filers in the final bill.
  • Student Loan Interest Deduction: Current law remains, allowing deductibility of student loan debt up to $2,500, subject to income phase-outs. The House bill would have eliminated the deduction for interest on student loans.

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