2018 proposed tax changes

27 Replies

2018 is comming up fast and Washington is debating a tax reform bill. I have not heard anything local from Milwaukee or Wisconsin State level, but I would be curious to hear comments on the proposed tax bill on a federal level. Cutting back from 7 to 4 proposed tax brackets looks like good news for most of us. 

But there are a lot of details around this for example mortgage interest write offs and a cap for property tax write offs at $$10,000 - I am not clear if this is for your primary residence only of if that also applys to a rental portfolios? For those who pay $100,000 in property taxes, do we loose $90,000 in taxe deductions??

 credit for tables: Kelly Phillips Erb / Forbes

Your 100k in rental property tax bill is a business expense for the business. Your question is pretty much asking if the large commercial building around the corner like miller brewing can write off its 250k tax bill or will it be limited to 10k in tax write off.  The new guidelines are to lower the write off for higher income people as they now have a lower tax bracket. 

In California $10K property tax translates to $800K assessed value. Unless you just bought a 1M home 12K can be 2K loss deduction for the entire year or a few hundred dollar tax difference (more). You know and I know most bought earlier will not be assessed near that value due to prop 13 restriction. 

All the bill is centered around taxpayer principle HOME only.

Hope that helps.

I created a version of those tables, too, and played with different AGIs.  Those tax tables do result in a lower tax for a given AGI.  So... the kicker is, what's your AGI?  That's where all the changes take back (or, at least change) what the modified tax tables give.

Here's the actual bill:  https://www.scribd.com/document/363309136/Republic...

For property taxes, I think this only applies applies to tax on your residence.  This is in:

SEC. 1303. REPEAL OF DEDUCTION FOR CERTAIN TAXES NOT PAID OR ACCRUED IN A TRADE OR BUSINESS

(a) IN GENERAL.—Section 164(b)(5) is amended to read as follows:

And then dives into the changes.  Now, I did find the relevant code, and Section 164 does seem the right section.  But (b)(5) is titled:

(5) General Sales Taxes

Where this bill says:

‘(5) LIMITATION IN CASE OF INDIVIDUALS. —In the case of a taxpayer other than a corporation—

So, I'm unsure if I'm comparing the right law or not. 

The $10,000 limit is in section (B).  So, I think, putting all that together, this applies only to your personal residence(s) and would not apply to property taxes for rental or fix and flip real estate (i.e., "PAID OR ACCRUED IN A TRADE OR BUSINESS").

There are a BUNCH of deductible items repealed.  Here's the table of contents.

Subtitle D—Simplification and Reform of Deductions 

Sec.1301.Repeal of overall limitation on itemized deductions. 

Sec.1302.Mortgage interest. 

Sec.1303.Repeal of deduction for certain taxes not paid or accrued in a trade or business. 

Sec.1304.Repeal of deduction for personal casualty losses. 

Sec.1305.Limitation on wagering losses. 

Sec.1306.Charitable contributions. 

Sec.1307.Repeal of deduction for tax preparation expenses. 

Sec.1308.Repeal of medical expense deduction. 

Sec.1309.Repeal of deduction for alimony payments. 

Sec.1310.Repeal of deduction for moving expenses. 

Sec.1311.Termination of deduction and exclusions for contributions to medical savings accounts. 

Sec.1312.Denial of deduction for expenses attributable to the trade or busi-ness of being an employee

However, the standard deduction is significantly increased, though the personal exemption is repealed.  So, the net effect makes it seem likely many people who currently itemize will end up just taking the standard deduction.

Of special significance to house hackers is a HUGE change in the ability to exclude gain on sale of a primary residence from requiring that you live in it for two of the five years prior to sale to five of eight years prior to sale.  

SEC. 1402. EXCLUSION OF GAIN FROM SALE OF A PRINCIPAL RESIDENCE.

(a) REQUIREMENT THAT RESIDENCE BE PRINCIPAL RESIDENCE FOR 5 YEARS DURING 8-YEAR PERIOD.

That change takes effect for sales or exchanges after December 31, 2017.  So, if you bought a house you're living in any time from 1/1/12 to 12/31/15, and were expecting to sell sometime after 1/1/18 and planned to use this provision, you have a big change in plans.  Further, if someone has already managed the two year time period they have a very strong incentive to CLOSE by 12/31/17.  At best, I could see this passing in very late December, if it passes at all.  But if it does, buyers with cash in hand and a fast title company would be in a position to offer fire sale prices to seller who expected to move in early 2018 and use this provision.

I was having a conversation with another investor about this last night.   Thanks for all the great info.

267-981-2928

Property tax credit would only apply to non business properties, property taxes are a business expense for rentals, the  elimination of the mortgage interest deduction only would apply  to new mortgages over $500K  I really like the 12% for the first $90K as a married couple. I dont like the change for cap gains on "live in" Flips though, going to 5 of 8 years vs the current 2 of 5

@Jon Holdman  Thanks for sharing the details! I have seen your post on live in flips - great catch!  Going from 2 to 5 years is going to level the playing field between living in it or just flipping it from a tax perspective. Most live in flips I have written offers on this year would probably not been effected too much - simply, because they did not make any or much profit. I know how it works, have been there myself - if you don't look at it with the purpose of making a profit, but to create your own dream home, it's almost guaranteed to overspend.

@Scott Schultz it seems obvious that a rental property is treating property taxes as an expense, but I have not seen it spelled out specifically. I wanted to raise the question and get some input from people who are tax professionals. It's pretty clear on an appartment building, but how will it pan out for someone who househacks a four family, someone who converts his primary residence into a rental property etc? The devil is always in the details and I have learned not to assume. I sure hope you are correct!

The bill would make rental income subject to SE tax. Page 51 of the bill. It's strikes the 1st paragraph of 1402 (a) whichs excludes rental income from being subject to se tax. I think this is the biggest cause of concern for re investors.  

Rental income may be subject to self employment tax. That’s a big one I’m worried about.

holy crap, capping mortgage interest at 500 is huge. Rising home values effects everyone including multiplexes.. Out here in california, per 1million house roughly $40k annual in mortgage interest the first 10 years of buying a house. prop tax about 13k per year (will be capped at 10k in proposed plan). people who can buy this SFH are usually in the marginal 44% effective taxbrackets (28 federal, 9 state, 7.5 FICA). standard deduction was roughly 12.7k for married. so itemized vs standard was the difference between 53k and 12.7. 40.3k difference = 17k extra cash in your pocket as itemized vs standard deduction. Just tax incentive to buy vs rent a home is an extra 170k in the first 10 years alone.

under the new plan,

You’ll only get about 21.5k/year (homes capped at 500) of mortgage interest + 10k of prop tax. 31.5k itemized deduction vs new standard at 25.4k = 6.1k difference. That gives a 27k tax incentive to rent vs buy for the first 10 years.

Of course we have to consider appreciation, gaining principal equity vs renting. But just the tax incentive will decrease the incentives for buying.

most media outlets are very skeptical they'll be able to pass such large changes.  

Originally posted by @Sam Shueh :

In California $10K property tax translates to $800K assessed value. Unless you just bought a 1M home 12K can be 2K loss deduction for the entire year or a few hundred dollar tax difference (more). You know and I know most bought earlier will not be assessed near that value due to prop 13 restriction. 

All the bill is centered around taxpayer principle HOME only.

Hope that helps.

Really it is only 10k on 800k. I always thought CA had high property taxes 

I pay over 20 grand a year in property taxes on just my personal houses not including investment property 

Originally posted by @Michael Plante :
Originally posted by @Sam Shueh:

In California $10K property tax translates to $800K assessed value. Unless you just bought a 1M home 12K can be 2K loss deduction for the entire year or a few hundred dollar tax difference (more). You know and I know most bought earlier will not be assessed near that value due to prop 13 restriction. 

All the bill is centered around taxpayer principle HOME only.

Hope that helps.

Really it is only 10k on 800k. I always thought CA had high property taxes 

I pay over 20 grand a year in property taxes on just my personal houses not including investment property 

 20k a year! what is the property worth?  California effective prop tax is very low thanks to prop 13.  you have many people in palo alto with 3m homes makes 3k/year since property taxes are grandfathered in.  It's a typical screw the new guy policy.

Originally posted by @Rudy Duran :

holy crap, capping mortgage interest at 500 is huge. Rising home values effects everyone including multiplexes.. Out here in california, per 1million house roughly $40k annual in mortgage interest the first 10 years of buying a house. prop tax about 13k per year (will be capped at 10k in proposed plan). people who can buy this SFH are usually in the marginal 44% effective taxbrackets (28 federal, 9 state, 7.5 FICA). standard deduction was roughly 12.7k for married. so itemized vs standard was the difference between 53k and 12.7. 40.3k difference = 17k extra cash in your pocket as itemized vs standard deduction. Just tax incentive to buy vs rent a home is an extra 170k in the first 10 years alone.

under the new plan,

You’ll only get about 21.5k/year (homes capped at 500) of mortgage interest + 10k of prop tax. 31.5k itemized deduction vs new standard at 25.4k = 6.1k difference. That gives a 27k tax incentive to rent vs buy for the first 10 years.

Of course we have to consider appreciation, gaining principal equity vs renting. But just the tax incentive will decrease the incentives for buying.

most media outlets are very skeptical they'll be able to pass such large changes.  

 At what income would the effective tax rate be 44%? you know to hit the 28% bracket that rate is only on dollars $91,900-$191,650, so to pay 28% straight line you would be north of $500K/ year income, like most other countries we have a tiered system. we are all taxed the same on the dollars in that bracket, and it increases only on the dollars in the brackets above.

quoting myself above: SFH are usually in the marginal 44% effective tax brackets (28 federal, 9 state, 7.5 FICA).  

marginal effective tax rate is different than federal tax bracket. 40

I made a mistake though, deductions don't affect fica. so take off the 7.5 there.  marginal effective tax rate is about 37% for married californians over 190k+ agi.  (which is majority of people buying 1mil+ homes).  

existing, it's approx 14.9k/year + 150k in the first 10 years ago.

new, it's 22.57k first 10 years.

Originally posted by @Rudy Duran :
Originally posted by @Michael Plante:
Originally posted by @Sam Shueh:

In California $10K property tax translates to $800K assessed value. Unless you just bought a 1M home 12K can be 2K loss deduction for the entire year or a few hundred dollar tax difference (more). You know and I know most bought earlier will not be assessed near that value due to prop 13 restriction. 

All the bill is centered around taxpayer principle HOME only.

Hope that helps.

Really it is only 10k on 800k. I always thought CA had high property taxes 

I pay over 20 grand a year in property taxes on just my personal houses not including investment property 

 20k a year! what is the property worth?  California effective prop tax is very low thanks to prop 13.  you have many people in palo alto with 3m homes makes 3k/year since property taxes are grandfathered in.  It's a typical screw the new guy policy.

 I don’t really know what it is worth

Ah ok I get it now it is like govt subsidies to keep the taxes low as long as you keep owning it. 

I would like to get something on the coast of CA but then would be nailed on taxes as a new buyer 

It's still a big deal in the lower brackets.

any Californians (married) with agis between 103 and 150k are still paying (25 fed 9.3 state) 34.3% in this marginal bracket. $13,720 extra in your pocket (for buying vs renting) in current system.

Self emplyment tax on rental income would hurt, loosing itemized deductions ads to the pain. I wonder if SE tax will drive rental rates up further, although it becomes a matter of afordability at some point..

Here is a pretty comprehensive analysis on the tax proposal from Brandon Hall that just came out as a blog yesterday.

https://www.biggerpockets.com/renewsblog/tax-plan-...

The possible self-employment tax on rental income boggles me.  I mean did they not think that the majority of landlords will just raise their rent to cover it?  Its the same any corporation does when their taxes or expenses go up. They pass it on the consumer. 

I am excited about the fewer tax brackets as I will stand to benefit from that a lot. If it passes, the cap for property tax write offs would make me adjust my game plan down the road.  I'm sure there will be some..."loophole" that will be found. 

Some of these proposed changes are not good, but not nearly as bad as some people fear. 

1. Mortgage and property taxes limitations are for the primary residence only. Does not affect rentals or flips.

2. SE tax would only be on NET income - i.e. after all deductions and depreciation. Most SF investors show net losses, not net income on their rentals. So they can't care less.

3. Even when there's net income, the SE tax would not apply automatically. You'd need to qualify as "a trade or business" which has been a grey area of the tax law for long time. Casual passive investors and K1 investors should not be affected.

4. Where the new law is most troublesome is not SE tax but the ambiguous proposals around pass-through entities (S-corps and partnerships.) If this passes, a lot of investors will need to restructure their business entities. 

Originally posted by @Marcus Auerbach :

Agreed @ Michael, we will know soon enough..

Indeed.  Today will be amendment day in the Senate, so we will have a better idea tomorrow.  However, after that is Reconciliation between the House and Senate bills.

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