Property ownership can provide generous tax benefits and with the passing of the new tax plan, many are unsure about how these benefits may change or disappear. Here are three key tax advantages commonly associated with real estate and where they stand under the new tax plan.
Mortgage Interest Deduction
Those with existing mortgages of up to $1 million will be allowed to deduct interest for both a first and second home. For anyone purchasing after December 15, 2017, and borrowing over $750,000 to buy a personal residence or second home cannot deduct the interest associated with any amounts above a $750,000 loan.
The new tax plan suspends the deduction for interest on home-equity loans through 2025. Originally allowed up to $100,000, unlike the mortgage interest deduction, this deduction disappears for both new and existing borrowers. If you currently have a home-equity loan, it might be time to evaluate whether it helps you achieve your financial goals now that the deduction is no longer a benefit.
Notably, the tax plan also essentially doubles the standard deduction, so more homeowners are likely to choose the standard deduction moving away from the itemized deduction and reducing their reliance on the mortgage interest deduction for tax purposes.
Property Tax Deduction is Capped at $10,000
Taxpayers will no longer be able to fully deduct state and local property taxes plus income or sales taxes. Instead, the legislation allows individuals to deduct up to $10,000 in state and local income and property taxes or state and local property and sales taxes.
Some taxpayers have responded to this change in a frenzied rush to prepay their 2018 property taxes hoping to claim the deduction before it is capped under the new tax law. The IRS issued a memo advising taxpayers that they can pay property taxes for 2018, but only if those taxes were already assessed in 2017. That means people who estimated their 2018 tax bill themselves and sent out a check early won’t be able to claim a deduction. It only counts if they’ve been handed a specific bill by their state or local government (or can find that bill on the government web site).
Capital Gains Exclusion still applies
Taxpayers will still be able to exclude up to $500,000 (or $250,000 for single filers) from capital gains when they sell their primary home, as long as they’ve lived there for two of the past five years.
I hope this simplifies the real property aspect of the new tax plan. For many of us, real estate is the largest asset we own and can generate the largest tax benefits. Please remember, every tax situation is personal, so speak with your accountant and plan accordingly.
If you need assistance determining how these new laws may affect your real estate investments, connect with me.