The Tax Cuts and Jobs Act of 2017 (TCJA)

Implications From New Tax Plan in 2018, & How This Affects Homeowners

  • Individuals are allowed an itemized deduction for interest on principal residence and second residence mortgages up to a combined $750,0000.  This calculator may exclude those who exceed this figure.
  • Pre 12/16/17 mortgages are grandfathered and new purchase money mortgages may be grandfathered if the purchase contract is dated before 12/16/17
  • Refinancing of grandfathered mortgages are grandfathered but not beyond the original mortgage's term/amount
  • Interest on a Heloc is no longer deductible.
  • Capital Gain exclusion for primary residence remains unchanged 
  • 1031 Like-Kind exchanges are limited to real property assets (this does not expire in 2025)
 
 

For the majority of filers, the standard deduction will be greater than their itemized deductions. However, the increase in standard deduction may be neutralized by the  loss of personal exemptions. Families with multiple children will feel the loss of these exemptions. A married couple with no children or a single person may not be impacted by the loss of exemptions. 

SALT

Deductions for state, and local income, sales and property taxes (commonly referred to as SALT deductions) will be suspended and limited to 10,000 each year for years 2018 through 2025. 

Planning Points: 

  • This generally does not include property taxes related to rental properties or a business owner's home office, please review with your tax advisor the deductibility of expenses related to rental properties and home offices. 
  • The legislation specifically bars taxpayers from deducting 2018 state and local tax prepayments on their 2017 Federal return

Mortgage interest

For mortgage debt incurred after December 15, 2017 interest will be deductible on $750000 of acquisition indebtedness. Generally, interest on home equity loans, even existing loans, is not dedcutible through 2025. Given this new prohibition, taxpayers who have home equity loans in place should review the terms of the loan and associated costs. Additionally, there may be an opportunity to use interest tracing rules to obtain a deduction. Please consult with your tax advisor to assess your specific situation. 

PEASE

The itemized deduction phase-out, also called the PEASE limitation, has been temporarily eliminated. This limitation phased out 3% of a taxpayer's itemized deductions at certain income thresholds. Under TCJA, itemized deductions will no longer be limited for years 2018 through 2025. The effect of the removal of the PEASE limitation may further reduce the marginal and effective tax rates for certain taxpayers. 

Planning Point: 

  • Consult with your tax advisors on the viability of accelerating and or deferring income and deductions. Generally, accelerating deductions may be advantageous. Each taxpayer's situation is unique and you should consult with your tax advisor on the proper strategy for your particular tax situation. 
 

 Impact on the Residential Market

 Pros

Reduction in Tax Rates: 

  1. a) Tax rates were reduced in almost all brackets and up to as much as 4%; 
  2. b) The highest tax rate was reduced from 39.6% to 37%; and 
  3. c) All marginal brackets were adjusted as well, which would reduce federal income tax owed by a majority of individuals. 

 

 Cons

 Loss of Deductions Related to Home Ownership: 

  1. a) Mortgage interest deduction reduced and now only applies to mortgages up to $750,000.00 (down from $1,000,000.00); 
  2. b) No deduction for HELOC’s; and 
  3. c) $10,000.00 cap imposed on deductions pertaining to SALT (i.e. state and city income taxes and property taxes). Previously there was no cap. Also, deduction phases out based on income thresholds 

 Analysis: the loss of the deductions is something that will adversely impact those in states (like New York) with high income tax and property tax levels. It can be viewed as a disincentive for homeownership and will likely impact the first-time homebuyer market more than other segments of the market. However, every potential buyer should consult with their accountant to determine whether the reduction in tax rates and marginal brackets offsets (or potentially even provides an additional savings) in comparison to the loss of deductions. Also keep in mind that deductions were often times phased out based on one’s income level and not all taxpayers were able to utilize all of their deductions for this reason (due largely to the alternative minimum tax - “AMT”). 

 IRS Circular 230 Disclosure: 

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein; and is strictly to be used for informational purposes only and should not replace the advice of a tax attorney or an accountant.

Impact on Investment Properties & the Commercial Market

Pros

Reduction in Tax Rates: 

  1. a) Corporate tax rates were reduced from 35% to 21%; 
  2. b) Qualified business income (“QBI”) is now reduced by 20% on real estate investment income (held in a pass-through structure), for purposes of calculating your income tax (subject to the “wage limitation test”); 
  3. c) REITs: their undistributed income is subject to the maximum 21% corporate rate and REIT dividends qualify for the 20% deduction from QBI; and 
  4. d) 1031: the 1031 exchange laws were revised to remove personal property, but are still applicable to real estate investment properties. 

Cons

Will These Tax Cuts Result in Economic Growth That Will Benefit the Commercial Real Estate Market? 

  1. a) Reduction in corporate rates was viewed negatively by many and does not necessarily mean corporations will use the savings to expand operations (benefit the real estate market) and increase employment; 
  2. b) As it remains to be seen how the tax changes impact the real estate market, it could result in a pause in demand while consumers wait to see how this unfolds; and 
  3. c) Limitations on business interest deduction. 

 

Analysis: the reduction of 20% for QBI is viewed by many to be a once in a lifetime opportunity for real estate investors to maximize their profit and continue growing a portfolio. Due to this reduction, an investor that qualifies for the full deduction on income from a pass-through entity will effectively see the tax rate drop from 39.6 percent to 29.6 percent. This is subject to the Wage Limitation Test which begins to phase out the deduction for joint filers with taxable income between $315,000 and $415,000 and individual filers earning between $157,500 and $207,500. 

IRS Circular 230 Disclosure: 

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein; and is strictly to be used for informational purposes only and should not replace the advice of a tax attorney or an accountant.