The National Association of Realtors issued a news release that summarizes real estate related tax items in the Tax Cuts and Jobs Act put into place just before Christmas. They started by saying that Realtors can take some credit for many of the bill’s improvements during its development. The bill originally curtailed the capital gains exclusion that home sellers get today, but because of Realtors involvement, current law was kept in place. As a result, individuals can still sell their home and exclude up to $250,000 in proceeds from capital gains taxes. For married couples filing jointly, it’s $500,000.
On the commercial side, Realtors helped keep tax-deferred 1031 exchanges in place. House Republicans met with Realtors just after they released their original tax reform blueprint and heard that 1031 exchanges were crucial to commercial sales. NAR testified to that effect, too, before the Senate Finance Committee.
Other big changes Realtors helped secure include a compromise on the deductibility of state and local income taxes and property taxes. Households can still deduct both of these taxes, although they’re limited to a total of $10,000.
Realtors also helped fight back against limitations on the mortgage interest deduction. The law keeps in place mortgage interest deduction, for both primary residences and second homes (although it eliminates it for equity lines of credit), but it limits the deduction to $750,000. That’s a reduction of $250,000 from the old limit of $1 million, but it’s higher than the $500,000 included in the House bill.
NAR stated that despite these improvements, the new law, on balance, hurts homeownership. That’s because many households today that itemize their deductions will no longer find it financially advantageous to continue doing so. As a result, they’ll receive no benefit in the tax code for being homeowners.
Instead, under the new law, most homeowners will take the standard deduction, which is increased to $24,000 from a little above $12,000 today.
Although the deduction is larger, the gain is partially offset by the loss of the personal and dependency exemptions. Today, these exemptions are $4,150 for each eligible person in the household. For a household with four eligible people (wife, husband, and two children, for example), that’s $16,600 in lost exemptions. When you subtract that from the newly increased standard deduction, you see that you’ve made no or little gain from what you had before. For some households, it might make sense to go back to itemizing except that now itemized deductions are limited.
Lauren Bunting is a licensed Associate Broker with Bunting Realty, Inc. in Berlin, MD.
Lauren Bunting is a Broker with Keller Williams Realty of Delmarva in Ocean City, Maryland.
