The Tax Cuts and Jobs Act – What it Means for Homeowners

Nar.Realtor

Introduction

While NAR remains concerned that the overall structure of the final bill diminishes the tax benefits of homeownership and will cause adverse impacts in some markets, the advocacy of NAR members, as well as consumers, helped NAR to gain some important improvements throughout the legislative process. The final legislation will benefit many homeowners, homebuyers, real estate investors, and NAR members as a result.

The final bill includes some big successes. NAR efforts helped save the exclusion for capital gains on the sale of a home and preserved the like-kind exchange for real property.

As a result of the changes made throughout the legislative process, NAR is now projecting slower growth in home prices of 1-3% in 2018 as low inventories continue to spur price gains. However, some local markets, particularly in high cost, higher tax areas, will likely see price declines as a result of the legislation’s new restrictions on mortgage interest and state and local taxes.

The following is a summary of provisions of interest to NAR and its members. NAR will be providing ongoing updates and guidance to members in the coming weeks, as well as working with Congress and the Administration to address additional concerns through future legislation and rulemaking. Lawmakers have already signaled a desire to fine tune elements of The Tax Cuts and Jobs Act as well as address additional tax provisions not included in this legislation in 2018, and REALTORS® will need to continue to be engaged in the process.

The examples provided are for illustrative purposes and based on a preliminary reading of the final legislation as of December 20, 2017. Individuals should consult a tax professional about their own personal situation.

All individual provisions are generally effective after December 31, 2017 for the 2018 tax filing year and expire on December 31, 2025 unless otherwise noted. The provisions do not affect tax filings for 2017 unless noted.

Major Provisions Affecting Current and Prospective Homeowners

Tax Rate Reductions

  • The new law provides generally lower tax rates for all individual tax filers. While this does not mean that every American will pay lower taxes under these changes, many will. The total size of the tax cut from the rate reductions equals more than $1.2 trillion over ten years.
  • The tax rate schedule retains seven brackets with slightly lower marginal rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
  • The final bill retains the current-law maximum rates on net capital gains (generally, 15% maximum rate but 20% for those in the highest tax bracket; 25% rate on “recapture” of depreciation from real property).

Tax Brackets for Ordinary Income Under Current Law and the Tax Cuts and Jobs Act (2018 Tax Year) Single Filer

Current Law Tax Cuts and Jobs Act
10% $0-$9,525 10% $0 – $9,525
15% $9,525 – $38,700 12% $9,525 – $38,700
25% $38,700 – $93,700 22% $38,700 – $82,500
28% $93,700 – $195,450 24% $82,500 – $157,500
33% $195,450 – $424,950 32% $157,500 – $200,000
35% $424,950 – $426,700 35% $200,000 – $500,000
39.6% $426,700+ 37% $500,000

Tax Brackets for Ordinary Income Under Current Law and the Tax Cuts and Jobs Act (2018 Tax Year) Married Filing Jointly

Current Law Tax Cuts and Jobs Act
10% $0 – $19,050 10% $0 – $19,050
15% $19,050 – $77,400 12% $19,050 – $77,400
25% $77,400 – $156,150 22% $77,400 – $165,000
28% $156,150 – $237,950 24% $165,000 – $315,000
33% $237,950 – $424,950 32% $315,000 – $400,000
35% $424,950 – $480,050 35% $400,000 – $600,000
39.6% $480,050+ 37% $600,000+

Exclusion of Gain on Sale of a Principal Residence

  • The final bill retains current law. A significant victory in the final bill that NAR achieved.
  • The Senate-passed bill would have changed the amount of time a homeowner must live in their home to qualify for the capital gains exclusion from 2 out of the past 5 years to 5 out of the past 8 years. The House bill would have made this same change as well as phased out the exclusion for taxpayers with incomes above $250,000 single/$500,000 married.

Mortgage Interest Deduction

  • The final bill reduces the limit on deductible mortgage debt to $750,000 for new loans taken out after 12/14/17. Current loans of up to $1 million are grandfathered and are not subject to the new $750,000 cap. Neither limit is indexed for inflation.
  • Homeowners may refinance mortgage debts existing on 12/14/17 up to $1 million and still deduct the interest, so long as the new loan does not exceed the amount of the mortgage being refinanced.
  • The final bill repeals the deduction for interest paid on home equity debt through 12/31/25. Interest is still deductible on home equity loans (or second mortgages) if the proceeds are used to substantially improve the residence.
  • Interest remains deductible on second homes, but subject to the $1 million / $750,000 limits.
  • The House-passed bill would have capped the mortgage interest limit at $500,000 and eliminated the deduction for second homes.

Deduction for State and Local Taxes

  • The final bill allows an itemized deduction of up to $10,000 for the total of state and local property taxes and income or sales taxes. This $10,000 limit applies for both single and married filers and is not indexed for inflation.
  • The final bill also specifically precludes the deduction of 2018 state and local income taxes prepaid in 2017.
  • When House and Senate bills were first introduced, the deduction for state and local taxes would have been completely eliminated. The House and Senate passed bills would have allowed property taxes to be deducted up to $10,000. The final bill, while less beneficial than current law, represents a significant improvement over the original proposals.

Standard Deduction

  • The final bill provides a standard deduction of $12,000 for single individuals and $24,000 for joint returns. The new standard deduction is indexed for inflation.
  • By doubling the standard deduction, Congress has greatly reduced the value of the mortgage interest and property tax deductions as tax incentives for homeownership. Congressional estimates indicate that only 5-8% of filers will now be eligible to claim these deductions by itemizing, meaning there will be no tax differential between renting and owning for more than 90% of taxpayers.

Repeal of Personal Exemptions

  • Under the prior law, tax filers could deduct $4,150 in 2018 for the filer and his or her spouse, if any, and for each dependent. These exemptions have been repealed in the new law.
  • This change alone greatly mitigates (and in some cases entirely eliminates) the positive aspects of the higher standard deduction.

To illustrate how the above-listed changes can affect the tax incentives of owning a home for a first-time buyer and a middle-income family of five, please see these examples:

Example 1: Single Buyer

Example 2: Middle-Income Family of Five

Mortgage Credit Certificates (MCCs)

  • The final bill retains current law.
  • The House-passed legislation would have repealed MCCs.

Deduction for Medical Expenses

  • The final bill retains the deduction for medical expenses (including decreasing the 10% floor to 7.5% floor for 2018).
  • The House bill would have eliminated the deduction for medical expenses.

Child Credit

  • The final bill increases the child tax credit to $2,000 from $1,000 and keeps the age limit at 16 and younger. The income phase-out to claim the child credit was increased significantly from ($55,000 single/$110,000 married) under current law to $500,000 for all filers in the final bill.

Student Loan Interest Deduction

  • The final bill retains current law, allowing deductibility of student loan debt up to $2,500, subject to income phase-outs.
  • The House bill would have eliminated the deduction for interest on student loans.

Deduction for Casualty Losses

  • The final bill provides a deduction only if a loss is attributable to a presidentially-declared disaster.
  • The House bill would have eliminated the deduction for casualty losses with limited exceptions.

Moving Expenses

  • The final bill repeals moving expense deduction and exclusion, except for members of the Armed Forces.
  • The House-introduced bill would have eliminated the moving expense deduction for all filers, including military.

Major Provisions Affecting Commercial Real Estate

Like-Kind Exchanges

  • The final bill retains the current Section 1031 Like Kind Exchange rules for real property. 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.

Carried Interest

  • The final bill includes the House and Senate language requiring a 3-year holding period to qualify for current-law (capital gains) treatment.
  • Again, real estate stakeholders prevailed against long odds to preserve the incentive of capital gains treatment for carried interests in the final legislation.

Cost Recovery (Depreciation)

  • The final bill retains the current recovery periods for nonresidential real property (39 years), residential rental property (27.5 years) and qualified improvements (15 years). The bill also replaces separate definitions for qualified Restaurant, Leasehold, and Retail improvements with one definition of “Qualified Improvement Property.”

Qualified Private Activity Bonds

  • The final bill retains the deductibility of qualified private activity bonds used in constructing affordable housing, local transportation and infrastructure projects and for state and local mortgage bond programs.
  • The House bill would have eliminated the use of private activity bonds.

Low Income Housing Tax Credit

  • The final bill retains current law. However, a lower corporate rate will negatively impact the value of the credits in the future, and will result in less low-income housing being developed.

Rehabilitation Credit (Historic Tax Credit)

  • The final bill repeals the current-law 10% credit for pre-1936 buildings, but retains the current 20% credit for certified historic structures (but modified so the credit is allowable over a 5-year period based on a ratable share (20%) each year).
  • The House bill would have entirely eliminated the Historic Rehabilitation Credit.

Provisions Not Included in the Final Bill

Rental Income Subject to Self-Employment Tax

  • The House-introduced bill would have subjected rental income to self-employment taxes. This provision was dropped from the House (and final) bill.

Examples of How The New Law Will Affect the Tax Incentives of Owning a Home

Example 1 – First-Time Homebuyer. To illustrate how the changes to the standard deduction, repeal of personal exemptions, mortgage interest and state and local taxes might affect a first-time homebuyer, consider the example of Barbara Buyer. Barbara, an accountant making $58,000 per year, is single and currently rents an apartment. She also pays state income tax of $2,900 and makes charitable contributions of $2,088, but the total of these is lower than the standard deduction, so she claims the standard.

Barbara’s tax liability for 2018 under the prior law is as follows:

Salary income $58,000
Standard deduction ($ 6,500)
Personal exemption ($ 4,150)
Taxable income $47,350
Tax $ 7,491

Under the new law, Barbara would get a tax cut, computed as follows:

Salary income $58,000
Standard deduction ($12,000)
Personal exemption ($ – 0 -)
Taxable income $46,000
Tax $ 6,060

Tax Difference Under New Law. Even though Barbara would not get the benefit of the personal exemption under the new law, her higher standard deduction would more than make up for the loss. In addition, the lower tax rates of the new law would help deliver the total tax cut of $1,431 ($7,491 – $6,060) as compared with the prior law.

However, let’s take a look at what happens to Barbara if she were to purchase the condo that she likes costing $205,000. She takes out a 30-year fixed rate mortgage at 4% interest, putting down 3.5%. Assuming she buys early in 2018, her first-year mortgage interest would total $7,856 and she would pay real property taxes of $2,050.

As a first-time homeowner, her tax liability under the prior law would be computed as follows:

Salary income $58,000
Mortgage interest $ 7,856
Real property tax (1%) $ 2,050
State income tax (5%) $ 2,900
Charitable contributions (3.6% of income) $ 2,088
Total itemized deductions ($14,894)
Personal exemption ($ 4,150)
Taxable income $38,956
Tax $ 5,393

Note. Under the prior law, Barbara would lower her tax liability for 2018 by $2,098 ($7,491 – $5,393) by purchasing the condo. This is the financial effect of the prior law’s tax benefits of buying a home. This amount effectively lowers her monthly mortgage payment by $175 per month.

Now, let’s take a look at what her tax situation would be under the new law as a first-time homebuyer:

Salary income $58,000
Mortgage interest $ 7,856
Real property tax (1%) $ 2,050
State income tax (5%) $ 2,900
Charitable contributions (3.6% of income) $ 2,088
Total itemized deductions ($14,894)
Personal exemption ($ – 0 -)
Taxable income $43,106
Tax $ 5,423

Tax Difference Under New Law. Even though Barbara would still be able to claim all of her itemized deductions under the new law, she would lose the benefit of her personal exemption. This would mean that her taxes would actually go up under the new law by $30 ($5,393 – $5,423). But far worse, look at the tax differential between renting and owning a home. This difference, which was $2,098 under the prior law, has now shrunk to just $637 ($6,060 – $5,423), or $53 per month. In other words, under the prior law, Barbara was given a strong incentive to move into the ranks of those who own their home. The new law still offers her an incentive, but it is a shadow of what it was, and is unlikely to be very compelling.

Family with Teenagers in Living Room

Example 2 – Middle-Income Family of Five:

To illustrate how the changes to the standard deduction, repeal of personal exemptions, mortgage interest and state and local tax deductions, and increase in the child credit might affect middle-income family of five, consider the example of Steve and Melinda. Steve is a store manager making $55,000 per year, while Melinda is a school principal, earning $65,000. They have three children, ages 17, 14, and 9. Steve and Melinda recently relocated from another city, and while they are getting to know their new community, they are leasing a home. But they would like to purchase as soon as they identify which area is the best fit for their family. As renters, they pay state income tax on their salaries, totaling $6,000, and also make some charitable contributions equaling $3,120. Since these itemized deductions do not reach the level of the standard deduction, they do not itemize, but they expect to do so when they purchase their home.

Here is a look at Steve and Melinda’s tax liability for 2018, computed under the prior law:

Salary income $120,000
Standard deduction ($ 13,000)
Personal exemptions (5 x $4,150) ($ 20,750)
Taxable income $ 86,250
Tax before credits $ 12,870
Child tax credits (2 x $1,000 less $500 phase-out) ($  1,500)
Net Tax $ 11,370

Under the new law, Steve and Melinda, as renters, would get a tax cut, computed as follows:

Salary income $120,000
Standard deduction ($ 24,000)
Personal exemption ($ – 0 -)
Taxable income $ 96,000
Tax before credits $ 12,999
Child tax credits (2 x $2,000) ($   4,000)
Net Tax $ 8,999

Tax Difference Under New Law As Renters. Steve and Melinda lose the big benefit of the personal and dependency exemptions for the two adults and three children. And the increase in the standard deduction is not enough to make up for this loss. However, the big increase in the child credit for the two younger children and the lower tax rate are enough to deliver them a tax cut of $2,371 ($11,370 – $8,999) as compared with the prior law.

Let’s now consider how Steve and Melinda’s tax situation changes if they were homeowners, rather than renters. Assume they find an ideal home in a nice neighborhood that costs $425,000, and after offering a 10% down payment, Steve and Melinda take out a 30-year fixed mortgage at a 4% rate. Let’s say that their real property tax for the year totals $4,250, which is just 1% of the home’s value.

Here is how their 2018 tax liability would be computed as homeowners, under the prior law:

Salary income $120,000
Mortgage interest $ 15,189
Real property tax (1%) $  4,250
State income tax (5%) $  6,000
Charitable contributions (2.6% of income) $  3,120
Total itemized deductions ($ 28,559)
Personal exemptions (5 x $4,150) ($ 20,750)
Taxable income $ 70,691
Tax before credits $  9,651
Child tax credits (2 x $1,000 less $500 phase-out) ($  1,500)
Net Tax $  8,151

Note. Under the prior law, Steve and Melinda would lower their tax liability for 2018 by $3,219 ($11,370 – $8,151) by purchasing their home instead of renting. This is the financial effect of the prior law’s tax benefits of buying a home. This amount effectively lowers their monthly mortgage payment by over $268 per month.

Now, let’s take a look at what her tax situation would be under the new law as a home-owning family instead of renters:

Salary income $120,000
Mortgage interest $ 15,189
Real property tax (1%) $   4,250
State income tax (5%) (limited by $10,000 cap) $   5,750
Charitable contributions (2.6% of income) $   3,120
Total itemized deductions ($ 28,309)
Personal exemptions ($ – 0 -)
Taxable income $ 91,691
Tax before credits $ 12,051
Child tax credits (2 x $2,000) ($  4,000)
Net Tax $  8,051

Tax Difference Under New Law As Homeowners. For Steve and Melinda, most of their itemized deductions from the prior law are preserved by the new law. They are limited slightly ($250) by the $10,000 limit on the deduction of state and local taxes. However, they lose big by the repeal of the personal and dependency exemptions, which equal $20,750 for this family. Even so, Steve and Melinda receive a small tax cut of $100 ($8,151 – $8,050) under the new law, thanks to the much larger child credit and lower tax rate. But as renters, they received a tax cut of almost $2,400. Thus, buying a home becomes a net tax change of almost $2,300.

What happened? What happened is that the new law is taking away most of the tax benefits of owning a home. Under the prior law, this benefit was $3,219 for Steve and Melinda. But under the new law, they enjoy only a benefit of $948 ($8,999 – $8,051). This gives them a benefit of just $79 per month, which is obviously a far weaker incentive to own.

[1] Meaning one does not have to itemize deductions in order to claim it.

[2] This means that for single individuals, the benefit of the deduction would be fully phased out for taxable income levels above $207,500 and for married couples filing joint returns, the benefit of the deduction would be fully phased out for taxable income levels above $415,000.

[3] With the exception of some restrictions on the deductibility of entertainment expenses, the normal business expenses of real estate professionals were not changed by the bill.

[4] The new law provides single individuals with a $12,000 standard deduction.

[5] The prior law provided a tax credit of $1,000 for each child.

[6] The new law increases the standard deduction for married taxpayers filing a joint return to $24,000. Since this is higher than Andy and Emma’s itemized deductions, they will claim the higher standard deduction.

[7] The new law doubles the child tax credit to $2,000 per child.

[8] At this income level, Bobbie and Emil’s personal exemptions would be phased out.

[9] At this income level, Bobbie and Emil’s itemized deductions are reduced by 3% of the excess of their AGI ($445,000) over the 2018 phaseout threshold of $320,000, or by $3,750. $28,000 – $3,750 = $24,250.

[10] The new law repeals the itemized deduction phaseout (so-called “Pease” provision).

[11] These are made up of mortgage interest, state and local taxes, and charitable contributions.

[12] At this income level, David and Valerie’s personal exemptions would be phased out.

[13] At this income level, David and Valerie’s itemized deductions are reduced by 3% of the excess of their AGI ($450,000) over the 2018 phaseout threshold of $320,000, or by $3,900. $35,000 – $3,900 = $31,100.

[14] The new law repeals the itemized deduction phaseout (so-called “Pease” provision).

For more on the Tax Reform – click here.

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A Millennial’s Guide to Homeownership

Open the PDF version here: MillennialeGuide

You have an important decision to make!

Thinking about Moving?

Thinking about Moving?

Want to know the monthly real estate changes in Hollister and surrounding areas? Know the real estate market before you decide to buy or sell a home. Kristen Jurevich with Intero Real Estate Services has the details to help you make an informed decision. Here is a hassle free example of the information you would get right to your email.  You have nothing to lose, so sign up today!

September Market Snap Shots

Want To Buy A New Home In Hollister?

Be sure to contact Kristen Jurevich at (831) 635-6719 if you have any questions regarding new construction in Hollister. There are a lot of new homes being built in the city of Hollister that will be available this fall.

If you have a home to sell, Kristen Jurevich can also help you relocate. It only takes a phone call to make this new home yours today.

Where is the real estate market going in 2016?

Real Estate Changes in 2016Central California will march to its own drum.

California is not like the rest of the country, so it’s hard to compare California on a national level like CNN, CBS, and NBC tend to group together.  Even the real estate market in the Peninsula – San Francisco, San Mateo, Palo Alto down to the Bay Area in San Jose is even more unique and hard to compare on a California level.  The local housing market varies from mile to mile and location, location, location still stands strong.

The housing inventory on the MLS is relatively low, but that has been the new normal for South San Jose like Morgan Hill, Gilroy, and Hollister.   The real estate market has been tough for some buyers looking to invest or purchase their first home in a lower price range.  Using a local full-time agent will help point out some “pocket” listings and new constructions that are not on the MLS.

Since Intero Real Estate Services holds the market share in Hollister, our community oriented agents tend to hear about listings before they are active.  Sometimes we can make successful transactions without having to go public.  Seems to keep everyone happy and stress free.

New construction is booming in Morgan Hill, which is leading the trends followed by Gilroy and Hollister.  While the teezer base prices of new construction are appealing, home buyers spend well over $30,000 in upgrades for some standard features.  Buyers pay the price for the brand new tag, but communities went for years without new construction they greatly oblige to the prices.

Interest rates may rise in 2016, but not on a large scale originally anticipated.  Leslie Appelton Young shared that it really depends on the economy at that time before we see major increases.  With the Presidential Election 2016, America will just have to wait and see what is promised by the candidates. National Association of Realtors did a fantastic job stopping a “transportation” tax that would have impacted home buyers, so REALTORS had a win in 2015.

With home prices on the rise and flattening, investors are looking to buy properties to rent versus flipping.  Foreclosures and short sales are few and far between, so capitalizing on distressed properties are starting to become a thing of the past.

Home values have been neutral in San Benito County but Santa Clara County still remains a seller’s market.  If you have to buy a home in 2016, then it will be a great time for you to enter the real estate market.  Prices are not going down anytime soon, thanks to global powerhouses like Apple, Google, Twitter, Yahoo, etc.

If you would like a home value analysis or buyer location analysis, please contact Kristen Jurevich at (831) 635-6719 or (650) 503-4110 or MoveWithKJ@gmail.com

 

 

Hollister is More Than a Bedroom Community

After reading a Facebook blog from Hollister Mayor-Ignacio Velazquez with his new year resolutions for Hollister, I was compelled to take a trip to the San Benito County Planning Department to see what was going on with my little community.  With all the new construction developing down almost every vacant lot, I wanted to see if Hollister had any permits or potentials for commercial development.  Unfortunately my dreams were not fulfilled and Lowes or Home Depot did not fill the Hillcrest to Meridian spot.

With an estimated 1,200 homes on the horizon, I asked, “Where are all the people going to go? We only have one Target.”  I was told to “be excited” and Hollister is a “bedroom community.”  Although it was not said in a negative way, I could not help to challenge the remark. I am excited for growth and change, not to mention job security for Realtors like myself. But we also need a place for residents of all ages to go and spend their money locally.

For starters we do have Marich and DeBritos delicious chocolate factories that offers special tours to see divine sweets.  Hollister also contributes to a quarter billion dollars towards the San Benito Farm Bureau with worldwide distribution of vegetables, salad, bell peppers, and let’s not forget the Jurevich cherries.  San Benito Bene is a specialty store located in Downtown Hollister, that displays some of Hollister’s most elegant and personalize gifts.  The store’s owner Kathina is a key asset to the the San Benito Olive Festival which is following the successful profit generating Garlic Festival.

When the Board of Supervisors candidate Victor Gomez spoke at our San Benito County Association of Realtors meeting, he said that he “doesn’t see cars driving by on HWY 25, he sees wallets.”  Isn’t that the truth.  Money being spent elsewhere.  Even if a greater portion of sales stays local, we would have more funding for schools, first responders, and road maintenance.

Now that the ground breaking is happening, rest assure Realtors will be reaching out for more commercial development to sustain our growth.  Let’s make our home a better place to live.  Let’s provide necessities for families at the same rate we build homes.  Let’s be the change we wish to see in the world.

California Improving Markets

 

Wall Street Journal published an article about dirt cheap lots and land rapidly increasing to pricey commodities.  It sparked my interest, so I researched some available lots and lands in San Benito County through the MLS and about 20% have increased their price recently.  Home builders are swooping up the land, getting the permits, and selling them to eager home buyers.  Take a look at the chart below of major California cities that have seen an increase in permits.

ImprovingMarkets

 

Read the Wall Street article here.