The Tax Cuts & Jobs Act
Dec 20, 2017, The Senate and House of Representatives finally agreed on Tax Reform. The most significant revamping of the Tax Code in decades is meant to simplify taxes and incentivize corporations to create more jobs for Americans. Every aspect of the American Tax Code was on the table for sweeping change. While much of the focus is on the corporate tax structure, the value of home ownership was attacked from the beginning. After much debate the final bill leaves most of taxes pertaining to home ownership intact, but there are a few changes.
Mortgage Interest Deduction
At one point, it was rumored the Mortgage Interest Deduction was going to be erased completely. Currently, the IRS allows mortgage interest of homes up to $1,000,000 to be deducted from your adjusted gross income for huge tax savings. The final bill settled on allowing just $750,000 of mortgage interest to be deducted. This won’t affect much of the population in Omaha. For example, in 2017 there were just 26 homes purchased over $1M (75/25 LTV = $750K) in the Omaha area. Also, my experience is that many of these buyers are equity heavy and rarely go over the Jumbo Loan limit of about $500K. One other note is that the IRS will no longer allow anyone to deduct interest of Home Equity Line Loans.
State & Local Tax Deduction Limit
This provision has the potential to affect a lot of home owners. Currently, the IRS allows taxpayers to deduct what they pay for state, local income, property, and sales taxes and the new law will cap that about at $10,000. This is only applicable for those itemizing deductions for these applicable taxes. Home owners will be directly affected by their property tax deductions.
For example, a $400,000 home with a 2.5% mil levy pays $10,000 in property taxes. That is the max allowed and under the new law and they will not be able to deduct any of their local or state income taxes. This has the potential to have a tremendous impact on home owners, but lawmakers say the corporate and pass thru entity tax breaks along with the increased standard deductions will make up for those losses. I believe this will affect the “Move Up” market in Omaha who are considering buying a larger home.
Capital Gains Limits and 1031 Exchanges
One of the major victories for real estate owners and investors is the relatively untouched Capital Gains Exclusions and 1031 Exchange rules. Homeowners are still allowed a $250,000 single and $500,000 exemption for Capital Gains on their primary residence. They also kept the rule of only needing 2 of the previous 5 years as a primary residence to qualify (after threatening 5 of 7 years). Also, the 1031 Exchange rules remain intact except they will only apply to real estate and not personal or business equipment.
Some of the other major provisions that may affect home ownership include
- Corporate Tax Rate reduced from 35% to 21%
- Pass thru entities (S-Corp, LLC, etc) may deduct up to 20% of qualified business income
- Moving expenses will only be deductible to members of the military
- Student loan interest remains deductible up to $2500
- Death tax exemptions increased to $11M/$22M for estates
On the surface, the Tax Cuts and jobs Act will not provide a huge barrier to home ownership. The National Association of Realtors fought hard and helped lobby for several of the provisions to remain a benefit to home owners. In Omaha, the real estate market should not experience a significant change based on this new law. If anything, it should continue to stimulate the economy (at least for the start term) and keep consumer confidence high. It is still a great tome to by and sell real estate and we should have a banner 2018!
Chris Bober is an Associate Broker and leader of Team Bober, a group of REALTORS® at Nebraska Realty in Omaha, NE offering a wide range of real estate services including home and new construction sales, land and farm sales, and auctioneering services. For more information please call Chris at (402) 312-5076 or email him at info@ChrisBober.com. TeamBober.com