There’s no doubt about it, the December, 2017 Tax Cut and Jobs Act impacts homeowners. In fact, it has implications that will affect most Americans. Below is an overview of the changes looking through the lens of a real estate owner and investor. NOTE: I am not an expert on tax codes, these new laws, or how this will change your taxation. None of this should be taken as legal or financial advice. Tax codes are complicated and you should sit down with your CPA and/or tax advisor to understand exactly how your finances will be affected. Some peoples’ tax snapshot will be positively affected by individual tax code changes, and some will be negatively impacted. It all depends on your specific scenario. So again, make an appointment with a professional tax advisor to review your portfolio. As for the general overview, hang on to your seat, here we go:
The full mortgage interest deduction for purchases of first or second homes (purchased after December 15, 2017) lowered from $1 million to $750,000. Why does that impact us locally? The median single family home sale price in Boulder currently hovers around $1 million. If homeowners take on a mortgage over $750K, the interest paid on the portion of the mortgage exceeding $750,000 will no longer be tax deductible. This could potentially add a few hundred dollars a month in overall costs. My gut feeling is buyers in this price range won’t be deterred from buying a home by this marginal cost increase, but it is something to consider.
Winners in the new tax plan are home rental investors. Generally, these folks will continue to be able to deduct all rental property expenses including mortgage interest, property management fees, and property taxes. Due to this tax advantage what could happen – and this is solely my opinion – is an even tighter housing market as owners hold on to properties to use as rentals versus selling. In Boulder County with already-tight inventory, this isn’t great news for those looking to buy, but is good news for those looking to sell. Again, consult your tax expert on any investment you’re considering.
Home equity lines of credit (HELOC) for primary residences are no longer tax deductible. Investors of rental properties can deduct HELOCS as a business expense.
Standard Deductions nearly doubled in 2018, with a $12,000 standard deduction for single taxpayers and $24,000 for married couples, filing jointly. Itemized deductions will be used much less because most taxpayers will now take the higher standard deduction instead of itemizing as they won’t be able to take advantage of all of their mortgage interest deduction, they may be capped on their tax deductions (discussed below), and overall their total deductions just don’t add up to as much as this greatly increased standard deduction.
Personal Exemptions are gone! In the past, families received a deduction for each person in their household (generally). In 2017 this deduction was $4,050/person. Therefore, a family of four is losing over $16k in deductions. However, this may be slightly offset by an increased Child Tax Credit that has now been increased from $1,000 to $2,000 per qualifying child.
Good news if you’re ultra wealthy: you get a break on the estate tax. Currently taxed at 40% on estates worth more than $5.49 million for individuals and $10.98 million for couples, the new law doubles the thresholds until 2026. Therefore, a $10.97 million dollar home owned by an individual does not get a 40% estate tax levy.
Property taxes: there is now a $10,000 ceiling on the combined property tax & state income tax deductions. Most home owners in the country won’t be affected by this. However, homeowners in high state income tax areas and those with high property values will be hit the hardest; think New York and California. Here in Boulder County we are lucky to have relatively low property taxes and Colorado has relatively low state income taxes (a flat 4.63%) but with our pricey average home prices the higher end properties will be impacted.
The above changes relate specifically to real estate in light of the new Act. The plan affects overall finances that could alter how much people have in their pocketbooks to put down as down payments, against mortgage payments, or toward investment capital. For instance, tax rates have been lowered across the 7 tax zones. Parents keep more in their pockets; the child tax credit doubled to $2000 per child under age 17, and parents are allowed to earn up to $400K (up from $110K) to earn the credit. Taxpayers will see the Act’s changes affect paychecks starting in February 2018.
All of the tax plan changes revert back to the 2017 levels in 2026.
The changes are enough to make your head swim. A heartfelt thanks goes to Mark Sunderland, CPA, who reviewed this blog and offered his expertise to make sure I got all the tax changes correct! I appreciate the side-by-side “old versus new” charts The Sunderland Group compiled. And if you can invest 20 minutes to watch this video, Vlogger Graham Stephan helps digest the Act. As neither Graham nor I are tax experts, I can’t emphasize enough how important it is to consult with a tax professional to understand how you will personally be affected.
Real estate continues to be a good investment, especially in Boulder and Broomfield counties. Contact me if you’re curious about local investment properties, buying a home, or placing your home on the market. I’m not a tax expert, but I am an expert in local residential real estate!