Now that the dust is settling on the battle over tax reform, taxpayers across the nation are wondering what’s in it for them. The National Association of Realtors says the final bill will have some impact on homeowners, but says there are also tax benefits for anyone who owns real estate or works in the real estate industry.
NAR said association members fought hard to preserve existing tax benefits for homeowners and real estate investors. A few of the wins include the preservation of the 1031 exchange and the capital gains exclusion for home sales. But, each taxpayer will have to look at how the changes stack up for them, starting with new tax brackets (1).
Major Provisions for All Taxpayers
The new law lowers the tax brackets overall, but redraws the boundaries for each bracket. Because of the new income levels, some taxpayers may see tax savings while others may see an increase. NAR provides a complete chart that compares the old tax brackets to the new ones, but to give you an idea of the changes, here are a few examples;
The current income range for the 25% tax bracket is from $38,700 to $93,700. Under the new tax code, the tax liability drops to 22% for that bracket with a range from $38,700 and to $82,500. So the tax rate drops 3% with a cap that’s $11,000 lower than the previous cap.
The next tax bracket is 28% under the current law for people earning between $93,700 and $195,450. The new law reduces the tax bracket to 24% within an income range of $82,500 and $157,500. In this case, people in the upper end of the current range will experience a tax increase because they are getting bumped out of this bracket to the next one, which is 32%.
Beyond the basic ordinary income tax brackets and the doubling of the standard deduction to $12,000 for single filers, the new law eliminates the personal exemption. The current law allows a $4,150 exemption for the taxpayer, the spouse and each of their dependents. NAR says this change greatly reduces the benefit of the higher standard deduction, and will, in some cases, completely offset it.
Individual Taxpayer Tax Provisions
The battle over the mortgage interest deduction was resolved with a compromise. The final bill reduces the mortgage debt limit to $750,000 from $1,000,000. It also preserves the mortgage interest deduction on second homes, with the new limit. Loans taken out before the passage of the bill are grandfathered into the old higher limits. Any refinancing of homes on those grandfathered loans can also take advantage of the higher limits. The final result is more generous than the original proposal which would have capped the mortgage debt at $500,000.
The deduction for state and local income taxes has been preserved with a $10,000 cap. This is a step down from current law, but significantly better than initial proposals by the House and Senate to eliminate them entirely.
The new law includes a lower threshold for claiming a medical expense deduction. It was lowered from 10% to just 7.5%. The House had wanted to eliminate this deduction, but the final version is actually an improvement over the current one.
The child tax credit is also an improvement. It increases the credit from $1,000 to $2,000 with a much higher income level of $500,000. The deduction for student loan debt was also retained. Moving expenses will no longer be tax deductible unless you are a current or former member of the military.
Real Estate Tax Provisions
NAR listed several tax benefits for real estate investors that were saved from the chopping block, including the 1031 exchange and the capital gains exclusion for home sales, as I mentioned previously. NAR said, the preservation of these two provisions are major victories for real estate stakeholders.
Real estate professionals had hoped for a lower cost recovery limit for the depreciation of property. The new law retains the same limits as current law, which are 39 years for nonresidential real property, 27.5 years for residential rental property, and 15 years for qualified improvements.
The housing tax credit was preserved, but, NAR said, the lower corporate rate will have a negative impact on the value of that credit. The association said, that will also impact on the building of low-income housing in the future.
The House had wanted to impose a self-employment tax on rental income. NAR said that provision was dropped from all versions of the bill.
Business Income Deductions
Another big win for real estate investors is the new 20% tax deduction for small business owners including pass-through entities, sole proprietorships, and independent contractors.
One headline reads, “The GOP Tax Bill Could Create a Nation of Freelancers” because of this one provision (2).
The deduction was originally for businesses that did not provide personal service. That would’ve excluded much of the real estate industry because real estate agents provide a personal service. NAR said, it was able to secure an exception to this rule so people providing services could take the 20% deduction as long as they earned less than $157,000. But it’s also possible for businesses above that limit to get a lower tax rate based on a couple of different options involving wages paid and the cost basis of depreciable property. I’ll save that explanation for your accountant!
Examples of Tax Impact
NAR provides at least a half a dozen examples of different tax scenarios for individuals, couples, and businesses. In one example, a real estate agent saves about $3,000 a year in taxes under the new law. In another, a real estate broker saves $12,000 a year. While small business owners have the potential to save a bundle under the new rules, homeowners won’t be so fortunate. The last example demonstrates how a typical homeowner will end up paying slightly more in taxes. The examples show you all the income and expenses for each person under the old and new rules.
(1) NAR Article