Note: This post is for informational purposes only and is not intended to be tax advice. If you need further assistance, please consult an accounting or tax professional.
The tax reform bill passed by Congress and signed into law by President Tweeter took effect on January 1, 2018. Although various groups will take a beating from the new GOP Tax Plan, which represents the largest tax reform in 38 years, homeowners fared a lot better than we feared. Ultimately, many homeowner tax incentives remain intact.
“Collecting more taxes than is absolutely necessary is legalized robbery.”
Capital Gains Tax
I personally am grateful that an early version of the tax bill which included a proposed change to capital gains tax was not passed.* The current bill includes a residency requirement that homeowners must live in their home for two out of past five years to be able sell their home for a profit and NOT have to pay this tax.
The early versions of this bill in the House and Senate proposed changing to require that homeowners occupy their homes for 5 out of 8 years in order to not have to pay capital gains tax on the profits of their home sale.
This would have likely had a considerably negative impact on the Denver housing market.
Our fast-paced sellers’ market is primarily caused by low supply and high demand for housing.
Because the demand for homes in Denver has consistently exceeded the supply, we have seen rapid increases in home prices over the past few years. As such, most homeowners who purchased their starter homes two years ago will have acquired a good bit of equity in those homes.
Since many of these homeowners would be able to make a significant profit by selling their homes, a portion of these homeowners will choose to do so.
If this portion of homeowners opted not to sell their homes because paying the capital gains tax would significantly cut into their profits, our market would become yet even more brutal for first-time home-buyers because the inventory of starter homes would further decrease.
(As an agent who works with a lot of first-time home-buyers, my stress levels would have gone through the roof, which may have caused me to be an asshole to my friends and family, so let us rejoice that this portion of the bill did not pass.)
*REALTOR® lobbying groups likely played a strong role in keeping this portion of the bill from passing, because it’s not likely that the GOP had a change of heart
Deduction for State and Local Taxes for Homeowners
Property, state and local income taxes face a combined $10,000 deduction limit. In the final bill, taxpayers can itemize deductions up to $10,000 for their total state and local property taxes and income or sales taxes. The cap is the same for both individual and married filers.
As such, households that pay more than $10,000 in combined state and local taxes each year will be impacted by the new SALT limits.
In Colorado, where property taxes remain comparatively low, the deduction limit is not expected to have a major impact on our housing market.
Mortgage Interest Deduction for Homeowners
While the deduction limit pertaining to mortgage interest drops to $750,000 of debt on your primary residence, it remains $1 million for homes purchased before December 15 of 2017. Homeowners can refinance their existing mortgage balance up to $1 million while still being able to deduct the interest—the new loan cannot exceed the amount of debt being refinanced.
Although only 1.3 percent of all U.S. mortgages are likely to be impacted by the capping of the mortgage interest deduction, it poses a risk to large urban areas with high-priced housing stock.
“Most estimates suggest that by limiting some buyers’ purchasing power, capping the deduction could contribute to slower home value growth in the priciest communities, moderating the gains longtime homeowners can expect when they do eventually sell,” says Alexander Casey, Zillow Group Policy Advisor.
Interest remains deductible on second homes, but subject to the $1 million / $750,000 limits. The House-passed bill would have capped the mortgage interest limit at $500,000 and eliminated the deduction for second homes, so thankfully, the final bill is better for homeowners. In Colorado, where the median home price is below $400,000, the mortgage interest limit change from $1 million to $750,000 probably won’t have a great deal of impact.
1031 Exchanges and Real Estate Investments
Technically, 1031 Exchanges affect real estate investors rather than homeowners, but since we represent several investors in our practice, we are pleased that the tax reform does not affect the 1031 deferral of real estate.
While personal property 1031 Exchanges are no longer allowed, taxpayers may continue to use the powerful investment tool of Section 1031 Exchange for the exchange of commercial properties, residential properties, industrial properties, and so forth.