Affects of new tax law
by John M. Lee
As I finished my tax returns on April 15, I spoke to my CPA about the changes that the Tax Cuts and Jobs Act tax reform measure will have on homeowners and taxpayers starting this year. Here are some of the highlights:
• As with all tax changes, they are complicated and will impact some people more than others. So, please consult with your tax advisor if you want more information on how it affects you personally;
• The new law provides generally lower tax rates for all individual tax filers and retains seven brackets with slightly lower marginal tax rates of 10, 12, 22, 24, 32, 35 and 37 percent. This does not mean that everyone will pay less taxes as some deductions were taken away.
The largest one being the mortgage interest deduction, which has been reduced from $1 million to $750,000 of mortgage debt. The borrowers with existing debt of up to $1 million on Dec. 14, 2017, may still deduct the original amount. While this change does not affect most people in this country, it does have a large impact here in San Francis – co as our real estate prices are so high. This makes borrowing more expensive and will act to moderate price appreciation in the long run.
In the past, homeowners were also allowed interest deductions of up to $100,000 on their home equity loans regardless of how such loans were used. This meant that homeowners could use the funds for expenses unrelated to home improvement, such as buying a new car, paying for a child’s college education or funding any other purchases.
However, the new tax bill has closed this loophole and eliminated interest deductions for home equity loans spent outside the home. This means you must spend it on home improvement in order to qualify for interest deductions.
• The bill also replaced the unlimited deduction for property taxes and state and local income taxes with a $10,000 cap. Therefore, homeowners will only be allowed a maximum deduction of $10,000, where in the past, they could deduct what is actually paid.
So, if your property is assessed at $1 million and your tax bill is already more than the $10,000 limit, you can no longer deduct the balance of the property taxes and the state and local taxes that you would still have to pay. This also increases the cost of home ownership substantially in this area.
• Moving expenses are no longer deductible. The previous law allowed the deduction in fair amounts if certain requisites were met. This is no longer the case, except for members of the armed forces.
• The exclusion on capital gains when selling a principal residence remained the same. That is, if homeowners have lived in a property the last two out of five years, they can still exclude $500,000 of capital gains if married and $250,000 if single.
• The rules for like kind exchange, or what is commonly known as 1031 tax exchanges, also remain the same.
• Other changes include higher standard deductions of $12,000 for single individuals and $24,000 for joint filers. Personal exemptions previously at $4,150 each have been eliminated.
These tax reform changes will affect you in many ways when you file your 2018 tax returns. Some will benefit while others will not. The real estate industry will start to feel the pinch of these new laws soon.
Property markets in highly priced areas, such as in San Francisco, will bear the brunt of the tax law modifications. The decline in mortgage interest deductions, coupled with the $10,000 deductible limit, is bound to have a negative effect on our market. Only time will tell the impacts the new tax reform law will have on our marketplace.
If you are considering a move in real estate, please consult with an expert on how these changes will impact your financial picture.
John M. Lee works at Pacific Union and specializes in the Richmond and Sunset districts. For real estate questions, call (415) 447-6231.
Categories: Real Estate