2018 Tax Laws and Their Impact on Real Estate

2018 Tax Laws and Their Impact on Real Estate

Change can be scary, and there’s no doubt that the changes enacted by the December 2017 tax reform can seem rather daunting, especially when it comes to real estate. What exactly does the tax reform mean if you’re planning on buying or selling a home? There really weren’t enormous changes made regarding real estate, but it’s important that you take a minute to consider how these changes might affect your tax responsibilities.

What Will Tax Reform Change in Real Estate?

For the average, middle-class American prospective or current homeowner, it’s likely that changes won’t have any impact at all. Below, we’ll go over the changes made and when those might come into play in certain circumstances.

Mortgage Interest Deductions

You’ll still be able to deduct your mortgage interest under most circumstances. However, the cap that used to be set at $1,000,000 in mortgage debt was lowered to $750,000, but only for loans taken out after December 14, 2017.

This means that, so long as your mortgaged amount on your newly purchased home is under $750,000, you can deduct your mortgage interest as you would have been able to in the past. If you already own a home with a mortgage amount between the new $750K cap and the old million dollar one, you will be grandfathered in and still able to deduct your mortgage interest.

Only those planning to buy homes in 2018 or later and mortgage between $750,000 and $1,000,000 will be affected by this change.

State and Local Tax Deductions

The tax reform put a cap on how much you can deduct for state and local taxes paid for property, income, and sales, now set at $10,000. Once again, this won’t affect the majority of Americans, simply because most people don’t have to shell out that much in state and local taxes, to begin with.

People who own highly valued homes or those living in areas with particularly high tax rates may see a bit of an impact, but it generally shouldn’t affect real estate as a whole. In states and localities where taxes are high, this change may wind up leading to less new residents, but in Colorado, it shouldn’t pose any real issues.

Capital Gains Timing Changes

Though earlier drafts of the tax reform included changes to the requirements for how long a person must live in their home in order to qualify to pay no capital gains taxes on the sale of a home, these changes didn’t make the final cut. As it was before, a person who has lived in their home for two out of the past five years isn’t required to pay capital gains taxes when they sell their home, which means that even if they made money on the sale of their home, they wouldn’t need to pay taxes on those gains.

If you’re looking to celebrate the maintenance of the status quo on this issue, check out how you can get more than the asking price for your home and pay no taxes on it so long as it’s your primary residence.

What Does This Mean for You?

To be perfectly frank, probably not much. If you plan to buy a luxury home that will require a mortgage of over $750K and under a million dollars or live in an area with a supremely high tax rate, you may find that you will be paying a little more in taxes, but that’s not the case for most Americans.

The best way for you to determine exactly how the changes will affect you personally is to consult with your tax professional or accountant so they can show you any differences in your tax liability after the reform. Whether you’re buying or selling, chances are, these small differences in the tax code likely won’t affect your decision one iota, but it’s important to plan ahead to help ensure your finances stay in order.

If you’re considering selling your home this coming spring, feel free to reach out to us to discuss our approach to getting your home on the market and sold.

All reported sales were not necessarily listed or sold by the broker and are intended only to show trends in the area or shall separately identify the broker’s own sales activity. 

2 Thoughts on “2018 Tax Laws and Their Impact on Real Estate

  1. Paul says:

    What if I own a home and have a mortgage of 475,000 and I plan to buy an investment property? Would the limit on the deduction apply to the second mortgage? Can I deduct the second mortgage? Would it be the first 275,000 being deductible or none at all? (750,000-275,000=475,000).

    Thanks this is great info!

    • coloradodreamhouse coloradodreamhouse says:

      Paul:

      Great question. The new tax law is a bit confusing but the good news is the mortgage interest deduction on rental properties has not changed. You’ll still be able to deduct the full amount of mortgage interest on your rental properties. These will continue to show up as an expense item on your schedule E taxes.

      It gets a little tricky when we’re talking about second homes. If you have a primary home and a secondary home and both have mortgages you will only be able to deduct the mortgage interest on a combined $750,000. If the notes on both homes are more than $750,000 say $900,000 you’ll only be able to use the MID on the first $750,000. One caveat if your first and secondary home loans were originated and in place before 2018 you can use the mortgage interest deduction up to one million which was the old cap before the change in the tax law.

      Great questions. Keep them coming. We are here to help.

      Dan Polimino
      720-446-6325

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