Last December, we published an article on how the proposed tax legislation could impact real estate in Silicon Valley and beyond. Now that the dust has settled and the tax laws have been approved, finalized and analyzed by industry experts, below is an overview of the implications to real estate.
There continues to be seven tax brackets based on income but most of these have been lowered. The seven tax brackets are 10%, 12%, 22%, 24%, 32%, 35% and 37%.
The maximum of 15% for capital gains remains unchanged with 20% being applied to those in the highest tax bracket.
There is also a 25% rate on the “recapture” of real estate depreciation.
Mortgage Interest Deductions
The mortgage loan amount that can be deducted has been reduced from $1 million to $750,000. This applies to new loans taken out as of December 14, 2017 or later. All mortgages of the prior $1 million limit issued before this date are grandfathered in and are not subject to the $750,000 limitation. Neither amount is indexed for inflation.
Mortgage interest deductions for second homes remain allowable and are subject to the above requirements.
Homeowners can refinance mortgages that existed prior to the 12/14/2017 date up to $1 million and still deduct interest as long as the new loan does not surpass the amount of the mortgage being refi’ed.
With regard to HELOCs and home equity loans, the new law repeals the deduction of interest for these loans through December 31, 2015. The exception is when the funds from an equity or second mortgage are used to substantially improve the homeowner’s residence.
The revised tax laws have nearly doubled the standard deductions. The new deduction for a single taxpayer is now $12,000 (up from $6,350) while the deduction for married filing jointly has increased to $24,000 from the previous amount of $12,700.
State & Local Taxes (SALT)
During the next tax filing period, taxpayers will only be able to deduct a total of $10,000 in both state and local taxes for property, sales or income tax. This limit applies to both single and married filers and is not indexed for inflation.
Alternative Minimum Tax (AMT)
The AMT remains but with an increase in the amount of income that is exempt for individuals. This new tax law has repealed the corporate AMT.
Like-Kind (1031) Exchanges
The final bill preserves the existing 1031 exchange rules for real estate but rescinds this like-kind exchange for personal property.
Carried interest, also referred to as promoted interest, is financial interest in the long-term capital gain of a development. It is typically given to a general partner and can result in paying a lower tax rate.
The new legislation requires carried interest to be held for three years in order to qualify for the current-law capital gains protocols.
Pass Through Relief
Most entities such as S corporations, limited liability companies and even some sole proprietors will enjoy a 20% deduction off the top of their income. The income thresholds are $157,500 for singles and $315,000 for those married, filing jointly. This includes ALL income sources including rental income. If taxable income exceeds these amounts but is less than $207,500/$415,000 respectively, a deduction is still possible but at a reduced rate. Estates and trusts are also eligible for this pass through relief.
For specific information on how these new tax laws will affect you, we encourage you to contact your financial advisor or CPA.