Now that Congress has passed the “largest tax reform bill in three decades”, there is unfortunately a lot of misinformation floating around- even coming from CPAs and other “tax experts” who purport to educate us about the changes. Part of the confusion stems from tax code changes in the Senate or House bill discussed in the media that never made it to the final bill. There is also confusion about other deductions that have nothing to do with proposed changes that were cut. It seems to come down to plain old human nature. We don’t like change, and we get flustered when there is change (especially the largest tax reform in decades). It is probably just my own observation, but CPAs seem to have even more trouble dealing with change than the average person.
I am NOT a tax expert; this is for general information only. If you have any concerns or questions, please consult with a CPA, IRS Enrolled Agent, or other tax expert. The recent tax reform made tax return preparation simpler for many people, but made it much more complicated for some, such as small business owners in certain industries.
There are changes to standard deductions, exemptions, etc., but this article focuses on the tax changes related to owning a home. Keep in mind that most of the changes affect 2018 taxes and beyond, which you don’t file until 2019. There are a few exceptions that may affect your 2017 taxes, which people are filing now.
Casualty Losses
I am starting with this topic because it is one of the few applicable changes that is retro-active. This applies to 2016 and 2017 losses, not just 2018 and beyond. If you experienced a financial loss due to Harvey or the 2016 “Memorial Day Flood”, there is a special deduction for you on your taxes. If you experienced a financial loss due to Harvey, please make sure and discuss this with your tax preparer; or, if you prepare your own taxes, fully research this before you file your taxes. Look up "Casualty Losses". Taxpayers can take a deduction for casualty losses if the loss is attributable to a Presidentially declared Federal disaster such as Harvey.
Sale of Principle Residence
Great news- the tax exclusion on gains from the sale of a principal residence did not change.
Mortgage Interest Deduction
The new law limits deductible mortgage interest to loans of up to $750,000 for loans taken out after 12/14/17; it does NOT change treatment of existing loans. Also, you can refinance an existing loan and still deduct the interest on a loan up to $1 Million, if the new loan does not exceed the amount of the mortgage being refinanced. Interest on second homes remains deductible subject to the same dollar limits.
Home Equity Loans
The new law repeals the deduction for interest on home equity loans unless the money is used to substantially improve the residence.
Property Taxes
The law limits state and local property tax deductions to $10,000; this limit is not indexed for inflation.
100% Bonus Depreciation if you run a business out of your home
The law raises depreciation on tangible personal property acquired and building improvements after September 27, 2017 to 100% immediate depreciation. This applies to the percentage of the property that is used in your business, so the title “100% bonus depreciation” can be misleading. This doesn’t apply to the purchase of your home itself; just improvements made to it if it is used in a business. This is a complicated topic, so I highly recommend you have a tax professional prepare your return if this subject applies to you; the percentage of business use needs to be calculated correctly, and there is the additional determination of which improvements are fully depreciable. There is some debate by “tax experts” as to which improvements can be included. The law does reference property with up to a 20-year life expectancy. So, if you purchased a 30-year roof, the 100% immediate depreciation probably would not apply.
Like Kind Exchanges / 1031 Exchanges
The new tax law did NOT change 1031 exchanges as they apply to real estate. Personal property is no longer eligible. Be careful with this one; there is a lot of misinformation about this. I recently attended a presentation by a local CPA who claimed that real property purchased for a short time, i.e. for flipping, was no longer eligible for 1031 exchange. That is INCORRECT. Of course, if you are using 1031 exchanges or considering it, you should be working with a CPA or appropriate qualified tax professional AND a 1031 expert; so, verify with those experts.
Net Capital Gains
The maximum tax rate on net capital gains from “recapture” of depreciation from real property is 25% under the new law.
Meals and Entertainment
While this deduction does not apply directly to owning real estate, I want to address it because it affects many people and I’ve heard misinformation being disseminated about it. So, I think this topic is important to mention. Entertainment such as taking a client to an Astros game or other sporting event is no longer deductible. Business meals are still deductible at 50%; the “meals” part of “meals and entertainment” did not change. If you have a CPA or tax preparer who tells you something different, please verify the information with another trusted source.
Due to the extensive tax reform, now is a good time to work with a tax expert if you weren’t already using one and you have one of the complicated situations; i.e. you are a small business owner, you experienced casualty losses due to a federal disaster in 2016 or 2017, or you are considering a 1031 exchange.
I also want to give a big “thank you” to (National Association of Realtors®) for fighting (lobbying) hard for all homeowners to help us to retain most of the tax advantages related to owning a home. Home owners came out in good shape after the reform and it would not have been the case without their hard work. We are a little bruised, but it’s a minor wound that will heal quickly except for a small group of wealthy people. Also, much of the information here comes from NAR’s publication about the changes, which is a great resource. I’ve also talked with an IRS Enrolled Agent who specializes in Real Estate businesses and a tax attorney to resolve the information that was in dispute.
The good thing about all this confusing deduction information is that if you are trying to understand it, you probably are making money. If you don’t make much income, you don’t need deductions. So, it’s a good problem to have. May 2018 be a fruitful year for you!
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