Trying to sort out the key takeaways from the new tax bill? Here are some of the important changes you should be aware of. Contact us to discuss how the new tax laws may affect those of you who already own real estate or plan to purchase real estate in the new year.
1.Capital gains exclusion. In a huge win for current and prospective homeowners, the current law is left in place on the capital gains exclusion of $250,000 for an individual and $500,000 for married couples on the sale of a home.
2. Mortgage interest deduction. The maximum mortgage amount for households deducting their mortgage interest has been decreased to $750,000 from the current $1 million limit on primary and secondary homes. Filers who have mortgages issued before the Dec. 15, 2017, cutoff would be grandfathered in, and will still be able to deduct interest on up to $1 million of mortgage-related indebtedness.
3. State and local tax deductions (SALT). Both property taxes and state and local income taxes remain deductible, although with a combined limit of $10,000. Under current tax law, there is no limit on how much state or local taxes can be deducted from your federal taxes.
4. Interest on Home Equity Lines (HELOCs): Interest paid on home equity loans that aren’t considered home acquisition debt will no longer be tax deductible under the tax plan. Currently, homeowners can deduct interest on up to $100,000 of such indebtedness.
In the past, Americans have used their home equity to get low, tax-deductible interest rates on large purchases, even if they weren’t housing related. For example, one might use a home equity line of credit (HELOC) to purchase a luxury recreational vehicle at a cost of $100,000. Thus, the homeowner scores a lower interest rate (HELOCs are one of the least expensive ways to borrow money) and get the ability to deduct the interest from their taxes. The new tax plan closes this “loophole” for using home equity as a cheap source of consumer financing.
5. Pass-through entities. The bill significantly reduces the effective rate of tax on business income earned by independent contractors and income received from pass-through entities.
If you’re unsure of how these changes will affect you or the purchase of a home in 2018, give Danny a call at 949-413-6967.