The California Association of Realtors prepared the following to help our clients better understand implications of the new tax law…
On December 22, 2017, the tax bill known as the Tax Cuts and Jobs Act was signed into law by the President. The following is a brief summary of the general issues relating to real estate in California and is not specific tax advice. Specific questions about any individual tax situation should be directed to a tax professional.
SALT and Mortgage Interest Deductions
Two of the most discussed provisions in the TCJA affecting California are the state and local tax (SALT) deductions and the mortgage interest deduction. The TCJA imposes a $10,000 combined cap on all SALT deductions whether they are for real property taxes, or state or local income taxes, or sales taxes. This will primarily affect high-tax states such as California. The $10,000 limit applies to both single and married filers and is not indexed for inflation.
The mortgage interest deduction for existing mortgages of up to $1 million taken out before December 15, 2017, will not be affected. Homeowners may also refinance mortgage debts existing on December 14, 2017, up to $1 million and still deduct the interest, so long as the new loan does not exceed the amount of the mortgage being refinanced.
For any new loans, however, the cap for deduction will be $750,000. Deduction of interest on loans secured by a second house will still be allowed subject to the $1 million and $750,000 caps.
The interest on home equity loans will only be deductible if the proceeds are used to substantially improve the residence.
Tax Rates, the Standard Deduction, and the personal and dependency exemptions
There will continue to be seven tax brackets, but the marginal tax rates in each bracket will be slightly lower. The standard deduction will be nearly doubled to $12,000 for individuals and $24,000 for joint filers.
But the personal exemptions for taxpayer(s) and dependents is repealed. Under prior law, tax filers could deduct $4,150 for the filer and his or her spouse, if any, and for each dependent, but they will no longer be able do so under TCJA.
Qualified Business Deductions
A provision that may be helpful to real estate licensees is the deduction for qualified business income. It will allow an off the top (above the line) deduction of 20% of business income, subject to certain provisions. It will be available not only to certain pass-through entities, S corporations and Limited Liability Companies, but also for certain sole proprietors, such as independent contractors.
While personal service businesses, (which likely include real estate agents and brokers) were initially ineligible for the 20% deduction, the final bill has a personal service exemption. In other words, many real estate professionals will be able to take advantage of this deduction. There are income limitations of $157,500 for single taxpayers and $315,000 for joint filers. Above these income levels, phase out provisions apply.
Sale of Principal Residence – Exclusion of Gain
TCJA does not change the $250,000 for single filers and $500,000 for joint returns exclusions from capital gains tax for the sale of a principal residence when the homeowner has owned and lived in the home for two of the last five years.
TCJA retains the current long-term capital gains rate of 15% generally but 20% on those in the highest tax bracket. Depreciation recapture for real property remains at 25%.
Like Kind Exchanges
Tax deferred IRC section 1031 like kind exchanges for real property will be retained in the TCJA. Personal property 1031 exchanges are no longer allowed.
Moving expenses will no longer be deductible except for those in the military. Certain certified historic structures will still receive a tax credit. The child tax credit will be increased from $1,000 to $2,000. Casualty loses will be deductible only in a presidentially-declared disaster.
Side-By-Side Comparison: Prior Law vs. New Law
Click here to view the PDF: 2018_TaxReformLawChart
As with any tax law, the specifics of the taxpayer’s situation make a great deal of difference in the outcome. This summary is general in nature and you are advised to speak to your own tax advisor.