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Proposed Tax Bill 2018 and Real-Estate Repercussions

Are you planning to buy a primary or vacation home in 2018? Are your taxes higher than $ 10,000? Are you planning to sell your home and take advantage of tax exemption on gain? If you answered yes to any of these questions, the proposed tax bill may impact you.

Real-Estate impacting Tax Proposals

  • Mortgage Interest Deduction limit for NEW Buyers:

Presently, mortgage interest  ameduction is allowed on loans upto $ 1,000,000. This cap is reduced to $ 500,000 for new home loans from 2018.

  • Property tax Deduction limit:

Currently, entire property taxes are deductible. Bill proposes to limit this deduction only upto $ 10,000 taxes

  • Capital gains exemption timeline:

At present, gains on sale of primary resident are non-taxable ($ 250,000 for single filers and $ 500,000 for joint filers) IF owners owned and lived in the house for 2 out of 5 years. This timeline has increased to 5 out of 8 years- to claim tax exemption.

  • No mortgage interest deduction for Second and vacation homes:

Up until now, mortgage interest is 100% deductible on a second home (not more than 2 homes). Proposed bill eliminates this deduction completely.

  • Eliminates deduction for moving expenses:

Expenses incurred for moving for new job or transfer are deductible. But not under the proposed bill.

  • Investors gain, homeowners lose:

Real estate investors can still deduct the interest on their loans and property taxes without any cap. That’s because investment property deductions for interest or taxes are not itemized deductions. Rather, they’re deductions in computing net rental income.

As per Joe Rand- Chief creative officer at Better Homes and Gardens Real Estate – Rand Realty, the tax bill specifically exempts real estate investors from a new 30 percent limit on business interest deductibility, so it’s especially favoring them compared to other business owners.

Second, the bill preserves many other tax advantages for investment real estate: the deductibility of maintenance costs and depreciation, the like-kind exchanges and so on.

Third, one of the major tax changes in the bill — conferring a 25 percent tax rate on so-called “pass-through businesses” — could reduce the tax rate for passive real estate investors who buy and manage buildings through LLCs or partnerships, which is almost all of them.



As a professional servicing New Jersey (esp. North Jersey), North Jersey will be my basis for discussion.

  1. Property tax burdens in New Jersey run the gamut, averaging more than $11,000 in some counties in northern New Jersey to just below $4,000 in counties down south. As per NJ.com, Bergen and Essex counties crossed the $ 11,000 threshold in 2015. The mortgage interest deduction limit to $ 10,000 will definitely impact many homeowners in the high tax rate areas.
  2. As of today, November 12, 2017, NJ MLS has the following statistics for Active listings in Bergen county. Total 812 active listings priced under $ 500,000 VS. 938 active listings priced above $ 501,000 – $ 1,000,000. (Mortgage interest deduction is based on actual mortgage amount and not the price of the house. Furthermore, actual mortgage amount depends on % of down payment. I am using listing price for simplicity sake for a high-level discussion). As can be seen, more than 50% of near future homeowners in Bergen county will be impacted by capping mortgage interest deductions to $ 500,000 loan.
  3. By increasing the timeline to stay in the house for 5 of 8 years to claim tax exemption on gains, homeowners will stay put for a longer time. This may depress the already tight housing inventory.
  4. Considering that many NYC metro areas in New Jersey are affluent, homeowners buy second and vacation homes. Total elimination of mortgage interest deduction on these houses will make the market for such 2nd and vacation homes more expensive. Though, for homeowners who can afford the luxury to buy these other homes, this elimination may only have a mild effect, if any.
  5. Also, while people will still move for new jobs and better opportunities, eliminating deduction of moving expenses is just a dampner to the existing mood :-)
  6. Some analysts believe that increase in standard deduction (almost doubling it) will nullify some effects of real-estate impact. However, accounting and financial planning is not my area of expertise; hence will leave that analysis to the pros.

I had started writing this article on November 7, 2017. In the meantime, Senate bill is out too. Senate Bill completely eliminates deduction of property taxes. Also, while the Senate Bill retains deduction on mortgage interest, it only eliminates deduction on home equity loans. And some differences in the pass-through businesses tax rates.

How a particular reform will impact you, is a subject to be discussed with your CPA/Financial Advisor. Also, these are “proposed” tax bills. Whether and when it becomes law, in its entirety or amendments, is yet to be seen.


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