Understanding the Impact of the New Tax Laws on Real Estate Deductions

The new Tax Cuts and Jobs Act will make a number of changes to the way people pay taxes. Some will pay fewer income taxes, while some will pay more. Some will no longer be able to take deductions they once did, while some will be able to take new deductions.

Of particular interest to many have been the changes regarding taxes for home owners. Some of the proposed changes never ended up passing, but many did. You’ll need to consultant with an accountant or AZ tax attorney to understand how these changes will affect you personally, but here’s a quick look at some of the bigger changes:

Mortgage Interest Deduction

In the past, homeowners could deduct the interest that they paid on a mortgage loan up to $1 million. Under the new law, the loan amount will be limited to $750,000.

Anyone who got a loan before Dec. 14, 2017 will be able to continue to deduct the interest on mortgage loans up to $1 million. Those who got loans after that date will be subject to the new, lower limits. The same rules apply to interest paid on loans for second homes.

Those who have grandfathered loans up to $1 million may also be able to refinance their loans and still pay interest on loans up to the previous higher limit. However, if they refinance the loan for more than $1 million, they will not be able to deduct that interest.

Those who are paying interest on a home equity loan will no longer be able to deduct that interest. The only exception will be for those who are using the home equity loan to “substantially improve the residence.”

Under a previous proposal, the bill would have limited the interest deduction to mortgages up to $500,000, and it would have eliminated a deduction for interest paid on loans for second homes.

Gain on Sale of Principal Residence

A previous proposal would have required that people live in their homes for at least five out of the past eight years in order to qualify for an exclusion for paying taxes on the gains from the sale of a principal residence. However, the new law ultimately did not make any changes to current law in this area. Homeowners must only live in the home for two out of the past five years to qualify for the exclusion.

The previous proposal would also have phased out the proposal for taxpayers who made more than $250,000 per year (or $500,000 for married couples).

State and Local Property Taxes

Many homeowners have to pay both state and local property taxes on their houses. The new bill will allow taxpayers to deduct the amount they paid to state and local authorities from their federal income.

Under a previous proposal, such deductions would have been completely eliminated.

The changes that were passed allows for taxpayers to deduct up to $10,000 in the amount they paid on state or local property taxes. That limit is for both single and married taxpayers. Taxes that were prepaid in 2017 will not be allowed to be deducted in 2018.

Like-Kind Exchanges

The Tax Cuts and Jobs Act preserves Section 1031, which allows for like-kind exchanges for real property. In contrast, the act repeals the use of personal property such as art work, automotive fleets, and heavy equipment for such exchanges.

Numerous groups, including the National Association of Realtors, fought to preserve this rule, and they won against the odds.

Other Preservations

Many other rules that were proposed to be changed were preserved under the current law. The current recovery periods for depreciation of property were retained, as was the ability to deduct private activity bonds used to construct affordable housing. The tax credit for building low-income housing was preserved, though the lower corporate tax rate is said to negatively impact the value of such credits.

Many changes were made to the tax code overall, including to the purchase, sale, and tax obligation of real estate and commercial property. In some cases, the changes will help people (specifically those with lower incomes), and in some cases, they will increase the tax obligation.

The best way to know how the changes to the law will affect you is to consult with a Chandler tax attorney or certified public accountant. Silver Law PLC helps clients in Arizona. Our team includes former IRS tax attorneys near Gilbert, so they understand the tax code inside and out, and they can help you decipher the changes and how they apply to you. Call us today to talk with a tax attorney about how your real estate tax obligations will change for the 2018 tax year.

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