Tax Cuts and Job Act – What Does it Mean for Homeownership/Real Estate?

A lot of people are wondering what changes we will see with the new tax reform. The National Association of Realtors worked hard to keep many of the benefits that we appreciate as homeowners.

These changes will not apply to the 2017 tax year, but will start with 2018.

The final result:

Mortgage Interest Deduction:
The final bill reduces the limit on deductible mortgage debt to $750,000 (formerly $1,000,000) for new loans taken out after 12/14/17. Current loans of up to $1 million are grandfathered and are not subject to the new $750,000 cap. Interest remains deductible on second homes, but subject to the $1 million / $750,000 limits.

Exclusion of Gain on Sale of a Principal Residence:
The final bill retains current law. A taxpayer can exclude up to $250,000 ($500,000 for certain taxpayers who file a joint return) of the gain from the sale (or exchange) of property owned and used as a principal residence for at least two of the five years before the sale.

Deduction for State and Local Taxes:

The final bill adds limits. It 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 and is not indexed for inflation. Under the old tax law all property taxes paid to state and local governments could be claimed as an itemized deduction. (Assuming one didn’t pay the alternative minimum tax.) It was also possible to deduct state and local income or sales taxes.

Standard Deduction: 

The final bill provides a standard deduction of $12,000 for single individuals and $24,000 for joint returns. The new standard deduction is indexed for inflation.

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.

Like-Kind Exchanges (1031 Exchanges):
The final bill retains the current Section 1031 Like Kind Exchange rules for real property. Tax code provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under is tax-deferred, but it is not tax-free.

Moving Expenses:                                                                                                                                                                                                 The final bill repeals moving expense deduction and exclusion, except for members of the Armed Forces.

There are definitely some changes to the tax benefits of home ownership, but folks looking to buy need to still consider other pros to home ownership, like building wealth through equity and appreciation in value over time.