12A — January 12 - 25, 2018 — 2018 Forecast — M id A tlantic

Real Estate Journal


2018 F orecast

By Scott R. Saunders, Asset Preservation, Inc. Impact of the new 2018 tax law on real estate owners


he focus of this article is to provide an over- view of the new tax

tax issues not associated with real estate. Primary Residence Homeowners As a result of doubling the standard deduction to $12,000 for single filers and $24,000 for married filing jointly, ac- cording to Moody’s Analytics, as many as 38 million Ameri- cans who would otherwise itemize may instead choose the higher standard deduc- tion under the new tax plan. The doubling of the standard interest deduction, in essence, removes a previous tax incen- tive of moving from renting a

residence to home ownership. A likely unintended outcome will be fewer Americans choos- ing to become homeowners versus renting a residence solely for the tax advantages. Any home mortgage interest debt incurred before Decem- ber 15, 2017, will continue to be eligible for the home mortgage interest deduction up to $1,000,000. Any home mortgage interest debt in- curred after this date will be limited to no more than $750,000 qualifying for the home mortgage interest de- duction. Beginning 2018, the

deduction for interest paid on a home equity line of credit (“HELOC”) will no longer be eligible for the home mortgage interest deduction. However, the new tax law preserves the deduction of mortgage debt used to acquire a second home. This should have a positive impact on supporting property values in resort and vacation destinations. State and local taxes (re- ferred to collectively as “SALT”) can be deducted, but will no longer be unlimited as under previous tax law. The 2018 tax law will allow

homeowners to deduct prop- erty taxes and either income or sales taxes with a combined limit on these deductions be- ing limited to no more than $10,000. Top earners who live in a state with higher taxes like California, Connecticut, Oregon, Massachusetts, New Jersey, New York will be negatively affected the most by no longer having the pre- vious full federal deduction available. There is the poten- tial for home values in high state tax areas on both the West Coast and East Coast to see a reduction in property values partially due to the new capped SALT deduction at $10,000 and partially due to the new maximum $750,000 home mortgage deduction. A National Association of RE- ALTORS study found there could be a drop in home prices up to 10 percent in these and other high state tax areas as a result of limitations in the tax law that won’t be as favorable as prior law for some property owners. Both the House and Senate tax bills had originally pro- posed increasing the length of time a homeowner would need to live in a primary residence (from five out of eight years versus the current require- ment to live in a primary residence two out of five years to qualify for the Section 121 tax exclusion). This proposed change did not become a part of the 2018 tax law. Home- owners will continue to only need to live in their primary residence 24 months in a 60 month time period to be eligible for tax exclusion up to $250,000 if filing single and up to $500,000 if married filing jointly. Property owners will still have the ability to con- vert a residence into a rental property or convert a rental property into a residence and qualify for tax exclusion ben- efits under both the primary residence Section 121 rules and also potentially qualify for tax deferral on the rental property under the Section 1031 exchange rules. Investment Property Owners Investment property own- ers will continue to be able to defer capital gains taxes using 1031 tax-deferred exchanges which have been in the tax code since 1921. No new re- strictions on 1031 exchanges continued on page 18A

law, formally referred to as “The Tax C u t s a n d Job s Ac t ” , and the im- pact on both res ident ial p r o p e r t y o wn e r s a s

Scott R. Saunders

well as investment property owners. The scope of this over- view focuses on real estate- related tax law changes and generally does not delve into

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