On November 2, 2017, the House released its proposed tax reform bill. Senate Republicans released a summary of their tax proposal on November 9th. In order to become law, the bills need to be passed by the House and Senate, reconciled, and then the final bill must be passed by Congress and signed into law by the President. It’s the goal of the Republican leadership to sign the bill into law by the end of the year. I have received many questions from my clients wondering what it will mean for them as homeowners.
As of this writing on November 16, House Republicans just passed the tax reform bill. Republicans voted in favor of the “Tax Cuts and Jobs Act” 227-205, with every Democrat and 13 GOP members opposing the legislation, setting in motion a likely alignment with a bill now coursing through the Senate Finance Committee that could be brought to a vote within two weeks. Watch a video clip about the passing of the bill here.
Under the current House legislation, taxes would be slashed by more than $1.4 trillion over the next decade, in part by reducing the corporate tax rate from 35 percent to 20 percent. It would also cut the number of tax brackets from seven to just four and recalibrate the tax code to work similar to an international system already used by foreign nations across the globe.
In New York, New Jersey, California and North Carolina, where taxes are high, Republicans voted against the bill, insisting it hadn’t gone far enough to protect deductions on state and local taxes. The House bill caps property tax deductions at $10,000 while the Senate bill eliminates them entirely.
Here are the highlights of the proposed tax reform bill
- 1) Interest payment deductions on loans capped at $500k for new buyers only (currently it is $1 million).
2) Property taxes that households can deduct will be limited to $10,000. With the median price of a Marin County single family home at $1,255,000, new homeowners will pay on average $15,700 per year in property tax (=1.25% of purchase price), or $5,700 more than they can deduct. In New York, New Jersey, California and North Carolina, where taxes are high, Republicans voted against the bill, insisting it hadn’t gone far enough to protect deductions on state and local taxes. The House bill caps property tax deductions at $10,000 while the Senate bill eliminates them entirely.
3) Capital gains-The current law states if you’ve lived in your primary residence for two of the past five years, you can exempt up to $250,000 of your capital gains ($500,000 for married couples filing jointly). The new law states you have to own and live in the home for five out of the last eight years.
4) The bill eliminates the deduction for moving expenses.
5) The bill makes second-and vacation-homes much more expensive: Under the current law, let’s say you are buying that $1 million beachfront home, getting an $800,000 mortgage. At today’s rates, you’ll pay about $5,000/month as a mortgage payment, most of which (at least for the first few years) will be interest. Thus, if they pay $60,000/year in interest, you get a deduction of about $24,000, which means your effective payment is $36,000/year.
Under the new law, you can’t deduct that interest. So maybe you can no longer afford $60,000 a year in second home payments. If you can only afford that effective $36,000/year that you were paying under current law, your buying power just got slashed by about 40 percent.
- 6) The tax bill simultaneously creates or preserves a number of advantages for owning investment property. In other words, the tax bill is bad for homeowners, but not for real estate investors.
- First, real estate investors can still deduct the interest on their loans and property taxes without any cap. Homeowners can only deduct their mortgage interest up to $500,000, and property taxes up to $10,000, but there’s no cap for investors.
- That’s because investment property deductions for interest or taxes are not itemized deductions. Rather, they’re deductions in computing net rental income.
- Indeed, 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, this 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.
Fortunately, both tax proposals preserve the ability to defer taxes for exchanges of real property pursuant to Section 1031. However, exchanges of personal property are eliminated under both proposals. In order to become law, the bills need to be passed by the House and Senate, reconciled, and then the final bill must be passed by Congress and signed into law by the President. It’s the goal of the Republican leadership to sign the bill into law by the end of the year.
Credit: Joseph Rand and Jotham Sederstom for Inman News. Here is the link to the Inman Article, you need to be a subscriber to open it however: House Republicans Pass Tax Reform Bill.
Here is a quick recap of the current Tax Benefits of Home Ownership.
Tell your Members of Congress you oppose any tax reform plan that would weaken the tax incentives for owning a home, such as the Mortgage Interest Deduction, and not to let a tax reform plan increase taxes on homeowners by eliminating the state and local tax deduction.
Feel free to call me with any questions about how this will affect your real estate plans. I am happy to discuss it with you.
About the Author: The article The New Tax Plan – What Does It Mean for You as a Homeowner? was written by Sylvie Zolezzi. I am an award winning, top producing Realtor specializing in luxury residential real estate in beautiful Marin County, just north of the Golden Gate Bridge.
I offer a wide range of innovative and comprehensive real estate solutions for buyers, sellers and investors, attracting clients who demand excellence—in marketing, negotiations, market intelligence—and a genuine concern for their needs. My association with Decker Bullock Sotheby’s International Realty allows me to provide a high-end luxury experience to all my clients at every single price point. It also empowers me to leverage the unique combination of Sotheby’s global resources, Decker Bullock Sotheby’s International Realty’s growing market share and local knowledge with my unmatched social media networks to provide highly personalized service and unmatched exposure to my clients’ properties locally and worldwide.
I would welcome the opportunity to work with you. I can be reached via email at Sylvie@YourPieceOfMarin.com or by phone/text at 415.505.4789.