These are the main areas of concern people have about tax reform as it relates to the real estate industry. These changes begin in the 2018 tax year.
1. The capital gains exclusion on a primary residence which allows $250,000 per individual, or $500,000 per married couple tax free capital gain exclusion on a primary residence sale will remain as it is currently. It requires that you live in the home for 2 out of the last 5 years. This was proposed to go to 5 years out of 8 years. That would have made this exclusion available only after 5 years not 2.
2. The mortgage interest deduction will be capped on the interest paid on a $750,000 loan. Previously the mortgage interest deduction was for the interest paid on up to $1,000,000 in mortgage loan, plus an equity line of $100,000. $1,100,000). The interest deduction on a loan up to $1,000,000 originated before October 31, 2017 will still be deductible. The interest paid on a $100,000 home equity line will no longer be deductible.
3. The deduction on state and local tax paid, which includes property tax will be capped at $10,000 a year. This has been unlimited since congress approved an income tax in 1909.
4. Real estate investors- A last minute change will allow most real estate investors to deduct 20% of their taxable (net) rental income. These small businesses would be a pass through, but would not be subject to the limits of a service industry business.
5. Service industry pass through rate - A last minute change to help small business will help Realtors. Until Friday a service industry business would not qualify for the lower pass through rate given to S-corps, LLC’s, partnerships, and sole proprietors. Monday a provision was added that will allow small service industry businesses to be able to the deduct 20% of their net taxable income from the total. Unfortunately , for some reason, this would begin to phase out for those small businesses that earn more than $315,000 for married tax filers and $157,500 for individual filers. For example if you make $250,000 net and are married you would get a $50,000 deduction (20%) and you would be taxed in $200,000 at your normal rate. If you make $315,000 or more this deduction won’t be available to you.
6. Many agents have contacted me concerned that they will no longer be able to write off business expenses. That is a rumor. Employees will not be able to write off business expenses, not independent contractors which are small businesses. Small businesses which include sole proprietors (you do not need to incorporate), corporations, LLC’s and partnerships can write off business expenses. There is also changes in depreciation that will be more beneficial.