As promised, the president has signed the tax reform bill prior to Christmas. There is much discussion and conflict as to whom benefits and how. As far as homeowners though, there is little doubt what has changed.
The exemption for capital gains taxes on a principal residence remain the same. Proposed changes would have required the amount of time a homeowner would have to live in their home to qualify for the capital gains exclusion from two out of the past five years to five out of the past eight years. The House bill would have made this same change and would have phased out the exclusion for taxpayers with incomes above $250,000 single or $500,000 for a married couple. Those measures are not included in the bill the president signed on Friday thanks largely to the Realtors’ lobbying efforts.
The tax deduction for mortgage interest did change. The bill allows for interest on mortgages up to $750,000 to be deducted. Previously the maximum loan amount was $1,000,000, however if you owed more that $750,000 as of Dec. 14, you are vested and that interest will remain an allowable deduction. Mortgages for second homes remain deductible at the new maximums as well through 2025. Property tax deductions were also salvaged although in Idaho, where state income tax is a reality, some higher income individuals will notice a decrease in the amount of that deduction. The maximum deduction allowed under the new law is $10,000 as a combination of local property taxes and your state income tax liability. Realtors deserve some credit for inclusion of this provision too, since originally the deduction was eliminated completely.
Provisions affecting commercial real estate also included some Realtor wins like the retention of the deferred tax on 1031 exchanges. This provision allows investors to sell a property and reinvest in a similar property while avoiding capital gains taxes on the initial sale. It repeals the use of Section 1031 for personal property, such as art work, auto fleets, heavy equipment, etc. The exclusion of real estate from the repeal of 1031 like-kind exchanges is a major victory for real estate stakeholders, who had fought hard to preserve the provision for several years, and against long odds.
Members of Congress believed that the business income earned by sole proprietors, such as independent contractors, as well as by pass-through businesses, such as partnerships, limited liability companies (LLCs), and S corporations, should also receive tax rate reductions. Most real estate agents and brokers will be considered in a personal service business and would thus not normally qualify for the 20 percent deduction. NAR was able to help secure a major exception (the personal service income exception) in the final bill that will make it possible for many real estate professionals to be able to take advantage of the deduction. This exception provides that if the business owner has taxable income of less than $157,500 (for single taxpayers) or $315,000 (for couples filing jointly), then the personal service restriction will not apply. There is still much debate in the weeks ahead to fine tune the bill. As always consult your tax professional to understand the complexities as government continues to “make sausage.”
Judging from the victories won by the lobbying efforts of the National Association of Realtors, the best gift members could make this holiday is a generous donation to RPAC (Realtors Political Action Committee). If your agent doesn’t contribute, you might want to know why.
Trust an expert…call a Realtor. Call your Realtor or visit www.cdarealtors.com to search properties on the Multiple Listing Service or to find a Realtor member who will represent your best interests.
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Kim Cooper is a real estate broker and the spokesman for the Coeur d’Alene Association of Realtors. Kim and the association invite your feedback and input for this column. You may contact them by writing to the Coeur d’Alene Association of Realtors, 409 W. Neider, Coeur d’Alene, ID 83815 or by calling 208-667-0664.