OLG LEGAL COMMENTARY:
OLG Founder & Managing Partner
It may be difficult to ascertain what exactly has changed under the new Tax Cuts and Jobs Act and how these changes may affect real estate tax for home owners and real estate investors. This article will provide an overview of how the new Tax Cuts and Jobs Act will affect real estate, whether you own just your home, or you are a real estate investor, by identifying the information you need to know about each major provision.
Real Estate Tax Change: Capital Gains Exclusions
Effective on January 1st, 2018, homeowners can exclude up to $250,000 (or $500,000, if married filing jointly) of gains made from the sale of their primary residence, as long as the property was their primary residence for at least two of the five years prior to the sale. Under the new law, this exclusion may be claimed once in a two-year period.
If you have sold or plan to sell your home after December 31st, 2017, this provision of the new law will apply to you and you must have used the property as your primary residence for the required two-year period in order to claim this exclusion. If you sell a home that was not your primary residence, then you will not be able to claim this exclusion and you must pay capital gains on the sale. This provision of the new tax law will expire on December 31st, 2025.
Mortgage Interest Deductions
Under the previous law, homeowners could deduct the interest paid on mortgages valued up to $1 million on their principal residence and one other qualified residence. Homeowners could also deduct the interest paid on a home equity loan or home equity line of credit up to $100,000. Effective on January 1st, 2018, homeowners can include interest paid on the mortgage for a new home valued up to only $750,000 in their itemized deductions, which is less than the previous home valuation limit. Furthermore, under the new law, homeowners can no longer deduct interest paid on home equity loans.
If you are a new homeowner in 2018, these real estate taxation provisions of the new law will apply to you. If you are a current homeowner who took out a mortgage on or before December 15th, 2017, the new law will not apply to you and the previous $1 million cap will continue to apply. The previous law will also continue to apply to refinancing on mortgages taken out on or before December 15th, 2017, as long as the new mortgage amount does not exceed the amount of debt being refinanced. These provisions will expire after 2025.
As for second homes, under the previous law, homeowners looking to purchase a vacation home could deduct mortgage interest on a second home, as well as on their primary residence, as long as the combined mortgages were under the $1 million limit. Under the new law, this is no longer permitted, and mortgage interest may not be deducted for second homes. However, if you purchased a vacation home prior to 2018, you may continue to take advantage of any mortgage interest deductions you were previously eligible for.
State and Local Real Estate Tax Deductions
Under the previous law, all state and local property taxes (“SALT”) were deductible in the federal tax filing with no limit. The new law only allows homeowners to deduct up to $10,000 for SALT, for both individuals and married couples. While SALT deductions are now limited, standard deductions have increased, and it may no longer make sense for homeowners to itemize deductions. Under the new law, the standard deduction for taxpayers doubles to $12,000 for individuals and $24,000 for those filing jointly.
Bonus Depreciation Deductions
Qualifying property acquired and placed in service after September 27th, 2017, is eligible for a 100% bonus depreciation in the year it is placed in service. This first-year bonus depreciation has increasedfrom 50% under the previous law. Beginning in 2023, this rate decreases by 20% per year, until it is eliminated in 2027. Also new under the tax law is that 100% expensing is available for both new and used qualified property. Qualified improvement property includes leasehold improvement property, restaurant property, and retail improvement property.
Section 1031 exchanges allow real estate investors to take the profits from the sale of a property and move them tax free into a like-kind property. This allows investors to exchange properties without paying capital gains taxes immediately, by deferring payment until the replacement properties are sold. This exchange is still allowed under the new real estate tax law for real property, although it has been repealed for personal property.
- Casualty Losses: Under the previous law, taxpayers could claim an itemized deduction for property losses that were not covered by their insurance and which resulted from events such as natural disasters and fires. The new law restricts this deduction to only allow losses resulting from a disaster declared by the president to be deducted.
- Moving Expenses: Under the previous law, taxpayers could deduct moving expenses and related travel costs. Beginning on December 31st, 2017, the new law eliminated this deduction through December 31st, 2025. The only exception to this provision is for member of the military on active duty who are required to move pursuant to a military order.
While this article provides an overview of the how the new tax law, known as the Tax Cuts and Jobs Act, may affect your home or real estate investment business and how you, it is important to consult with your attorney regarding all of the factors that may affect you as the new tax law could have further implications on your personal situation.
Jennifer Englert is the managing partner and founder of The Orlando Law Group, PL. For over 15 years, she has focused on business disputes, business law, general civil litigation, special needs & education law, family law, personal injury, and real estate. She has represented entities and individuals in both federal and state trial and appellate courts.
Founded in 2009, The Orlando Law Group, has been named one of the fastest-growing law firms in Central Florida and through America [ranked No. 105 among the top 500 fastest-growing law firms in the United States, per the 2017 Law Firm 500]. It has earned a reputation as the Orlando-area law firm that cares about its clients and the communities it serves. Offices located throughout Orange and Seminole counties. To contact Englert, or for more information about The Orlando Law Group, please visit www.TheOrlandoLawGroup.com or phone 407-512-4394.