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Tax Cuts and Jobs Act vs Portland Real Estate

Today Congress completed the passage of The Tax Cuts and Jobs Act, H.R. 1, and the President is expected to sign it into law shortly. Most of its provisions take effect in 2018, and a few take effect now. The following is a summary of the provisions directly affecting real estate:

Rental Property Owners

  • IRC Section 1031 Like-Kind Exchanges will still be allowed for real property transactions.
  • No changes to mortgage interest and property tax deductions.
  • Pass-Through Entities: Last minute (and controversial) addition of real estate partnerships, LLC’s, and S corporations as “pass-through entities” for purposes of sharing the benefits of the corporate rate reductions. Consult a professional if relevant.

Homeowners

Note: Amounts stated are for married taxpayers filing joint returns. Single and married taxpayers filing separately are often, but not always, half the stated amounts.

Mortgage Interest Deduction

  • Current Law
    • Claim as an itemized deduction interest paid on mortgages up to $1,000,000 used to acquire or improve a first and/or second home.
    • Claim interest paid on up to $100,000 in home equity loans.
  • Final Bill
    • No change for existing acquisition and improvement debt.
    • $750,000 cap on home acquisition and improvement debt incurred on or after 12/15/2017, unless part of a written binding contract before 12/15/2017 to close before 01/01/2018 and actually closes before 04/01/2018 (got that?).
    • No deduction for home equity loan interest (other than acquisition debt) after 2017 regardless of when incurred.

State & Local Tax Deductions

  • Current Law
    • All non-business state and local income or sales taxes (but not both) and property taxes may be claimed as itemized deductions.
  • Final Bill
    • Non-business state and local income taxes or sales taxes deductible.
    • Property taxes deductible.
    • Aggregate deduction limited to $10,000.
    • Cannot deduct 2018 income taxes prepaid in 2017.
      • 12/29/2017 update: Paying before year-end the balance of your estimated 2017 liability makes the payment deductible in 2017. Overpaying probably won’t help, but won’t hurt, either. And if you are subject to the alternative minimum tax it could be irrelevant. So run your calcs or check with your tax advisor.
    • Can you deduct 2018 property taxes prepaid in 2017?
      • 12/29/2017 update: The bill did not address property taxes, leading many to assume that prepaid property taxes would be deductible in the year paid. The IRS posted an advisory notice Wednesday stating that property taxes not only need to be paid in 2017, they must also be assessed in 2017 in order to be deducted this year. With very few exceptions that means that in Oregon the 2017-2018 property taxes are deductible this year if paid, and the 2018-2019 property taxes, which won’t be formally assessed until next fall, are not, at least according to IRS advice. Property taxes are also a tax preference item for purposes of the alternative minimum tax, so include that in your consideration.

Changes To Standard Deduction

  • Current Law
    • $6,350 Single filer, $9,350 Head of Household, $12,700 Married Filing Jointly
  • Final Bill
    • $12,000 Single, $18,000 HofH, $24,000 MFJ
    • Inflation indexing: 2018 at $12,200/$18,300/$24,400
    • Result: Far fewer people will itemize their deductions, effectively eliminating the tax incentive to buy a home.

Exclusion Of Gain on Sale of Residence

  • Current Law
    • Exclude from taxable income up to $500,000 in capital gain ($250,000 for single taxpayers) from the sale of a principal residence that has been owned and lived in two of the last five years.
    • May use the exclusion once every two years.
  • Final Bill
    • No change to current law.
    • Note: Both House and Senate versions required owning and living in the home for at least five of the last eight years to claim exclusion. Change dropped from final bill.

So What Is The Impact?

  • Tax rate and other changes may or may not lower federal income tax liability.
  • Doubling the standard deduction makes mortgage interest and property tax deductions irrelevant for most people.
  • Eliminates tax incentive to buy a home for most people.

Wondering how this affects your 2018 real estate plans?
Give us a call at 503-222-4300.