How will the Tax Cuts and Jobs Act affect real estate?
That question was the focus of our two-part article series late last year. At the time, we analyzed key points in the two versions of the bill (the House version and the Senate version) that were floating around in Congress, discussed why some trade groups and industry associations had expressed opposition to the proposals, and explored how tax reform could impact homeowners, developers, and the real estate and construction industries at large. Click here to read Part 1, and here to read Part 2.
Now that the proverbial dust has settled and the bill has been signed into law, we can compare and contrast the predictions with the reality. Read on to learn what elements of the bill have changed—and what has remained in place—since our last update:
Altered Standard Deductions, Mortgage Interest Deductions, and SALT Deductions
In November, we wrote that both versions of the bill would raise the standard deduction from $6,350 to $12,000 for single filers ($12,700 to $24,000 for married couples filing jointly), and that the House plan would also cut the deductible mortgage interest loan limit in half—from $1 million to $500,000.
The new standard deduction is indeed $12,000 for single filers and $24,000 for joint filers. And the mortgage debt cap has been reduced—but to $750,000, rather than $500,000. The same is true for second homes, despite the fact that both versions of the bill initially scrapped the deduction. Note that the new threshold only applies to mortgages taken after December 15, 2017.
The elimination of the state and local taxes (SALT) deduction was another sticking point in the GOP’s proposals. However, the finalized bill retains the SALT deduction, although it limits the deductible amount to $10,000 for individuals and married couples.
New Income Tax Rate and Implications for Pass-through Companies
As Republicans intended, significant income tax changes are ahead for business owners. The new tax code allows owners of “pass-through” companies to deduct 20% of their business income—before calculating income tax. Most small and medium-sized businesses in the US, including S corporations, limited liability companies, sole proprietorships, and partnerships, are pass-through companies.
Any of these entities can claim the 20% deduction unless the business is classified as a “professional services” company (e.g. a healthcare, accounting, law, or consulting-oriented organization) and the owner’s taxable income exceeds $157,500 (or $315,000 for joint filers).
The Fate of the Capital Gains Exclusion
Before the bill became law, several different proposals contained startling changes in capital gains rules. Both the House and Senate sought to prevent homeowners from excluding capital gains from a sale of their primary residence unless the taxpayer lived at the property for at least five of the past eight years and collected no more than $250,000 ($500,000 for married couples) from the sale.
Real estate professionals can breathe a sigh of relief: the new tax code does not change the capital gains exclusion at all. Homeowners can still keep up to $250,000 ($500,000 for joint filers) from the sale of their primary residence, and only need to have resided in the home for two of the past five years to do so.
In addition to the details above, members of the industry should take note of the following changes:
- Businesses can now write off the cost of qualified property they have acquired and placed in service anytime between September 27, 2017 and January 1, 2023.
- The Section 179 depreciation limit has increased from $510,000 to $1 million, while the total equipment acquisitions cap has increased from $2,030,000 to $2.5 million.
- The Domestic Production Activities Deduction (DPAD), which many contractors previously used to deduct 9% of their Qualified Production Activities Income (QPAI), has been eliminated.
- The final bill preserves the Historic Tax Credit (HTC), the New Markets Tax Credit (NMTC), and the Low-Income Housing Tax Credit (LIHTC)—although other elements of the Act may negatively impact the value of the LIHTC program.
Outlook and Next Steps
All told, the updates to the tax code are significant, but do not add up to the profound upheaval some analysts forecasted. That said, tax reform will affect real estate developers and homeowners in a myriad of ways. The new SALT and mortgage interest deductions will increase tax liability for homeowners in high-tax states, possibly compelling those states to enact local laws to reduce the burden.
Moreover, the new tax code may have a broad and long-term impact on market forces. Zillow estimates that only 14.4% of U.S. homes will be “worth enough for it to make sense for a homeowner to itemize their deductions and take advantage of the mortgage interest deduction”—down from 44% of homes. And Forbes reporter Samantha Sharf writes that “eliminating the tax incentive to buy a home is a major shakeup to residential real estate industry—not to mention to a culture that has long glorified homeownership.”
To learn more about your or your business’ unique tax obligations and opportunities, speak to your legal partner. The attorneys at Offit Kurman can help you plan ahead to reduce your liability and overcome your legal challenges. Click here to learn about our comprehensive legal services. If you have any questions anything contained the new tax code, or any real estate or construction law matter, click here to contact us.
ABOUT NATHAN FOX
Nate Fox is a real estate, construction, and business lawyer. He represents developers, homebuilders, property owners, business owners, and construction clients in transactions and zoning and land development proceedings. Nate brings uniquely practical experience from his time as a project manager for two luxury homebuilders to zoning, land development, and construction matters. He has successfully represented and appeared on behalf of clients in the state and federal courts of Pennsylvania and New Jersey, as well as before various municipalities in southeastern Pennsylvania, the Lehigh Valley, and New Jersey.
ABOUT TRACIE CLABAUGH
Tracie Clabaugh assists real estate developers, homebuilders, lenders and homeowners with a wide variety of real estate transactions and land use and zoning matters.
Tracie prepares, reviews and negotiates various types of commercial and residential real estate contracts and leases. She also drafts documents related to homeowner associations, disclosure documents for builders and developers, corporate documents for homeowner associations, deeds, deeds of trust, promissory notes, commercial contracts of sale, forbearance agreements and other real estate related agreements and instruments. She reviews title work and provides title opinions, reviews improvement plans, engineering plans, detailed site plans and surveys for real estate transactions, performs due diligence and manages community reviews for builders and developers. This work includes, but is not limited to, updating homeowner association disclosures, preparing necessary easement agreements and working with municipalities and County governmental entities in order to obtain the required subdivision approvals.
ABOUT OFFIT KURMAN
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