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Tax Cuts and Jobs Act 2017 highlights that may affect homeowners

The sweeping tax bill signed into law just before the 2017 holidays brings changes for virtually all homeowners — but, for the most part, not until you file your 2018 tax return in 2019.

My previous blog came at a time when these bills were proposals with major differences between House and Senate. Below are highlights of Final Bill that passed as Law (Tax Cuts and Jobs Act 2017)

Highlights that may affect homeowners:

Tax Rate Reductions:

The tax rate schedule retains seven brackets with slightly lower marginal rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

Apparently, it looks like most Americans will pay lower taxes. However, for those with high mortgages/ high taxes and high income; who itemized taxes in excess of $ 12k (single) and $ 24k (joint filers), I am not sure!!!

Capital gains exclusion on sale of primary residence:

Homeowner must live in the home for 2 out of past 5 years for capital gains exclusion. This has been unchanged from previous law.

This was a significant victory that NAR (National Association of Realtors) achieved in final bill. Senate Bill was trying to increase homeowner occupancy for 5 out of 8 years for capital gains exclusion.

Mortgage Interest Deduction

Mortgage interest deductible is limited to loans of $750,000 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.

Refinancing debts existing on 12/14/17 upto $ 1 million are interest deductible as long as new loan is not greater than loan being refinanced.

Interest on 2nd mortgages and second-homes is deductible but subject to 750,000/1,000,000 limits above. But interest is repealed for home equity debt.

The House-proposed bill would have capped the mortgage interest limit at $500,000 and eliminated the deduction for second homes in its entirety The final law, while less beneficial than old law, represents a significant improvement over the original proposals

The cap of $ 750,000 applies across all mortgages. Meaning if a buyer with a $500,000 mortgage borrows $300,000 for a second home, the interest on $50,000 worth of those mortgages is not deductible.

Even if both mortgages are less than $ 750,000, the $ 10,000 cap on state and local income tax deductions holds no matter how many homes you own.

Deduction for State and Local Taxes

Itemized deduction limited 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.

Original Senate proposal allowed Zero deductions. Again, new law is beneficial over the original proposals.

Standard Deduction

Standard deduction doubled to $12,000 for single individuals and $24,000 for joint returns.

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 it will also diminish financial incentives for renters to buy. More in another article of the newsletter.

Moving Expenses

Moving expense deduction repealed, except for members of the Armed Forces (which was originally proposed for all filers).

Like-kind exchanges:

The final bill retains the current Section 1031 Like Kind Exchange rules for real property.

Again, a major win for real-estate stakeholders as the proposals planned to repeal these

 

Conclusion:

I will let the economists and analysts debate on how above factors will affect the market and demography.

Do you have any inputs or real-life experience related to above? I would love to hear (and maybe include in a future blog)

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