Impact of new tax bill (Forbes article)

26 Replies

Here a good article by Forbes that breaks down a lot of the new stuff in the tax bill. It clearly mentions real estate at least twice. The author argues that those who sell real estate could be adversely affected because they’re eliminating or capping most deductions like property taxes and interest. And for live in flips you’d have to live there 5 out of 8 years to get the capital gains exclusion. On the flip side it looks like rental property owners are winners as they can take depreciation faster and get to deduct 23 percent of qualifying income. So it depends on what part of real estate you’re involved in to know how this would affect you. https://www.forbes.com/sites/anthonynitti/2017/12/02/winners-and-losers-of-the-senate-tax-bill/#662579f6254d

Doubling the standard deduction to $24k (if married) and raising child tax credits will help most people. That's a fact.  Think of the millions of renters and avg Jack and Jills.  It will also make filing for most much easier.

I personally haven't been able to deduct primary mortgage interest since 2012 anyway when we refi'd to 3.375%. I think we pay like $6500/yr is all, so SALT, car tabs, charitable contributions haven't been deductible for a while.

Are most people (outside of the few really expensive markets) really paying more than $12k/yr in interest currently at 3-4%?  I doubt it.  

If you're not even close to paying $24k in mortgage interest per yr, the state and local taxes (SALT) you pay will be built in to your standard deduction.  Not fair to high tax blue states, but most won't be paying 'more' in the end.  They just aren't getting 'credit' for paying at the local and state level.  'Incentives' to owning appear to diminish overall.

Glad they didn't completely get rid of the estate tax. I'm mostly ok with it doubling. I know it's not equitable to pay taxes over a lifetime only to be taxed again at death, but as a country, we couldn't afford not to get the ultra wealthy one last time...

Personally, I will benefit further but shouldn't. Curious to hear others' thoughts on this.  Thanks for starting this @Caleb Heimsoth !

  

It isnt very clear to me how the changes will affect deduction of rental property property taxes. Since my LLC's are flow through, does it mean each LLC will get to deduct it's property taxes up to 24k and it sends the next profit or loss as a flow-through?

Originally posted by @Maxime Tremblay :

It isnt very clear to me how the changes will affect deduction of rental property property taxes. Since my LLC's are flow through, does it mean each LLC will get to deduct it's property taxes up to 24k and it sends the next profit or loss as a flow-through?

 Everything I've seen is only limiting the deductions for your personal residence. Rental property taxes would still be fully deductible.

Originally posted by @Chris Clark :
Originally posted by @Maxime Tremblay:

It isnt very clear to me how the changes will affect deduction of rental property property taxes. Since my LLC's are flow through, does it mean each LLC will get to deduct it's property taxes up to 24k and it sends the next profit or loss as a flow-through?

 Everything I've seen is only limiting the deductions for your personal residence. Rental property taxes would still be fully deductible.

i guess none of this is final yet, but it would be brutal not to be able to deduct property taxes. Have you read about the accelerated depreciation schedule and if it will be applicable to purchases after enacting of the bill? Current depreciation schedule is 27.5 years 

@Caleb Heimsoth The limitations would apply to personal only. For real estate investors there would be no limitations.

@Steve Vaughan There are areas of the country where middle and upper-middle class will be affected negatively, where new standard deduction is not going to cut it. In addition, the double standard deduction is a scam, especially for families with children. If you pay close attention to your tax return, you get two deductions (currently) - 1) standard or itemized and 2) personal exemptions. 

Just to put it in perspective, say for a family of four:

 - 2017 standard deduction $12,700 

 - 2017 personal exemption is $4,050 x 4 =  $16,200

So, right now, at a minimum, a family of four gets a deduction of $28,900, which will be replaced by $24,000, as personal exemptions are eliminated.

Moreover, most families who own a house and living in states with income taxes do itemize. Taking a modest house purchased at $300k, mortgage interest is about $10k-$11k / year (relatively new purchases). Add real estate taxes and state income taxes, and for many families itemized deductions are north of $20k.

Without going into many more details:

 - winners: single, and families who do not own a house

 - losers: families who own a house

There are exceptions in the categories above, so this is just a broad generalization.

Thanks for the link.  Interesting read.

Can someone explain this to me: 

"Loser: Real Estate Brokers

No more deduction for interest on home equity debt. A $10,000 cap on the deduction for real estate taxes."

Chris

@Chris Wallace I think they say that because the loss of certain tax breaks for owning a primary residence would make owning a home more expensive and therefore would have people buy less houses or move less.

Is there any clarity regarding the potential change in criteria for avoiding capital gains taxes (2 out of last 5 as primary being changed to 5 out of last 8)? Currently in the process of a live-in flip, 2 years is up in July of 2018- would this change affect only purchases after the date the bill takes effect, or would I now be required to live in this property for an additional 3 years?

Originally posted by @Caleb Heimsoth :

Chris Wallace I think they say that because the loss of certain tax breaks for owning a primary residence would make owning a home more expensive and therefore would have people buy less houses or move less.

 That makes sense now.  I somehow couldn't make the connection with the way it was presented.  Thank you.

Realtors, current home owners and brokers would seem to be adversely affected.  Not sure how much the actual market will be affected.

Chris

Originally posted by @Brad L. :

Is there any clarity regarding the potential change in criteria for avoiding capital gains taxes (2 out of last 5 as primary being changed to 5 out of last 8)? Currently in the process of a live-in flip, 2 years is up in July of 2018- would this change affect only purchases after the date the bill takes effect, or would I now be required to live in this property for an additional 3 years?

Hi Brad,

My reading of the bill is that the new 5 years out of 8 requirement will kick in immediately.  However, it is not uncommon for the Treasury Department to issue Regulations providing some relief.  You cannot count on it, but do not be surprised in March or April if you start hearing news that Regs were issued saying that the new requirement will only go into effect for houses purchased after 1/1/18.

Originally posted by @Vlad K. :

@Caleb Heimsoth The limitations would apply to personal only. For real estate investors there would be no limitations.

@Steve Vaughan There are areas of the country where middle and upper-middle class will be affected negatively, where new standard deduction is not going to cut it. In addition, the double standard deduction is a scam, especially for families with children. If you pay close attention to your tax return, you get two deductions (currently) - 1) standard or itemized and 2) personal exemptions. 

Just to put it in perspective, say for a family of four:

 - 2017 standard deduction $12,700 

 - 2017 personal exemption is $4,050 x 4 =  $16,200

So, right now, at a minimum, a family of four gets a deduction of $28,900, which will be replaced by $24,000, as personal exemptions are eliminated.

Moreover, most families who own a house and living in states with income taxes do itemize. Taking a modest house purchased at $300k, mortgage interest is about $10k-$11k / year (relatively new purchases). Add real estate taxes and state income taxes, and for many families itemized deductions are north of $20k.

Without going into many more details:

 - winners: single, and families who do not own a house

 - losers: families who own a house

There are exceptions in the categories above, so this is just a broad generalization.

While some people living in states with state taxes may itemize I wouldn't say most. It definitely depends on the state tax rate. Also what I haven't seen yet is clarification on the child tax credit which is meant to offset the loss of the exemptions for those in lower brackets. There will always be losers in any legislation change. Higher taxed states will definitely lose out but that isn't the majority of the U.S either.

Originally posted by @Brian Schmelzlen :
Originally posted by @Brad Lighthall:

Is there any clarity regarding the potential change in criteria for avoiding capital gains taxes (2 out of last 5 as primary being changed to 5 out of last 8)? Currently in the process of a live-in flip, 2 years is up in July of 2018- would this change affect only purchases after the date the bill takes effect, or would I now be required to live in this property for an additional 3 years?

Hi Brad,

My reading of the bill is that the new 5 years out of 8 requirement will kick in immediately.  However, it is not uncommon for the Treasury Department to issue Regulations providing some relief.  You cannot count on it, but do not be surprised in March or April if you start hearing news that Regs were issued saying that the new requirement will only go into effect for houses purchased after 1/1/18.

 that would sure make me and a bunch of others happy all of us planning to sell in 2018... our primary and take the exclusion.

The Senate version disallows interest on HELOCs. That would be a hit for an investor like me wanting to tap equity in my primary residence to expand my rental holdings. It wouldn’t deter me, but it’s a nice tax benefit that could go away!

@Scott Kaczmarek Assuming the interest tracing rules continue to be in effect, then your HELOC interest might still be deducted on Sch E if it can be traced to rental properties.

@Scott Kaczmarek see the post above. You can trace the HELOC and deduct on schedule E as interest expense. I’ve done this the past two years and plan to continue to do so. I use HELOC exclusively for investment property downpayment and irregular expenses.

Interesting discussion.  In an attempt to be proactive, I look at the past, in the 80's when the passive losses deduction was eliminated.  Many investors dumped their housing investments and the house market took a hard hit.

I'm not seeing this as a risk at this point. But I can't help but feel massive changes like this won't have an economic effect in the housing market.

Profit deduction on home sales: People may not move unless they really have to...or they will rent out their house until they can sell it (if they've lived in it long enough) without facing a tax penalty.  This means less buy/sell transactions overall.  I can't predict the percentage hit, but Realtors should be give it some thought.  On the flip side, people don't really think about the tax consequences of selling their homes and sell for more important reasons. Tax savings is usually a minor part of their decision to sell.

Housing Prices:  Prices could fall as buyers have less incentive to purchase homes.  Or, if they do purchase, they want it at a lower price so it will make up for the additional costs of not deducting certain expenses.  Again, on the flip side, prices could rise as inventory could be lowered as homeowners don't want to pay a hefty tax bill on their profits.  However if the price is high enough to cover that tax bill, then they may sell.

As investors: A serious look at your corporate structure may be in order as some deductions are allowed for some types of business formations, but not other types.  For example, if you change your business to a non-passthu type business, you are eligible for more deductions and will be taxed at a lower rate.  However, if you take the money out of your entity you are at risk of "double taxation".

What are your thoughts on these issues?

Originally posted by @Jean Norton :

Interesting discussion.  In an attempt to be proactive, I look at the past, in the 80's when the passive losses deduction was eliminated.  Many investors dumped their housing investments and the house market took a hard hit.

I'm not seeing this as a risk at this point. But I can't help but feel massive changes like this won't have an economic effect in the housing market.

Profit deduction on home sales: People may not move unless they really have to...or they will rent out their house until they can sell it (if they've lived in it long enough) without facing a tax penalty.  This means less buy/sell transactions overall.  I can't predict the percentage hit, but Realtors should be give it some thought.  On the flip side, people don't really think about the tax consequences of selling their homes and sell for more important reasons. Tax savings is usually a minor part of their decision to sell.

Housing Prices:  Prices could fall as buyers have less incentive to purchase homes.  Or, if they do purchase, they want it at a lower price so it will make up for the additional costs of not deducting certain expenses.  Again, on the flip side, prices could rise as inventory could be lowered as homeowners don't want to pay a hefty tax bill on their profits.  However if the price is high enough to cover that tax bill, then they may sell.

As investors: A serious look at your corporate structure may be in order as some deductions are allowed for some types of business formations, but not other types.  For example, if you change your business to a non-passthu type business, you are eligible for more deductions and will be taxed at a lower rate.  However, if you take the money out of your entity you are at risk of "double taxation".

What are your thoughts on these issues?

Jean, interesting points.  I think, like  in the 80s, there could be a short-term loss in value.  However, I think that will create a lot of opportunity for investors with a long-term view to purchase properties at great prices.

I'm looking forward to seeing the final version. When it's out, BP will be a great place to stay ahead of the news, and strategize with other investors!

I know there are some changes, but I have a feeling we'll come out on top. Historically, real estate investors always do ;) 

Concerning the new law, 5 years owner-occupied rather than two (current law is two years) years owner-occupied so to avoid the capital gains on the profits from the sale. I was under the impression that one could avoid paying any capital gains if one sold the property due to health or job placement x miles from existing sold property. Basically, one could own a property for less than the two-year mark, sell and pay no capital gains on the profit so long as the sale was for health or employment relocation reasons. Does anyone know if this loophole is still legal or even obtainable within the new proposed law?

I saw one draft was to eliminate the self employment tax exemption for landlords.  Is that still in the bill?

My BIGGEST CONCERN with this crazy tax plan is that the 1.4 trillion increase in the deficit is going to create a manic growth in values given some of these larger corporation income increases and thats going to drive up interest rates as the fed bumps up the fed rate.  

Aside from my fear about this plan driving up rates, I think for me, as a buy and hold investor, this is probably a positive tax bill in the end but just by a little. I think the elimination of the mortgage interest up to 10k won't have that much effect in my area. The elimination of the property tax deduction might though. 250k houses, you are going to lose some of your deduction as you will likely be paying over 10k a year in interest. And here in illinois in my areas, you're likely paying about 8 to 9k in taxes on a 250k house. Putting a 10k limit is going to cost people 2 to 4k in my area if I had a guess. Thats a hit.

And beyond the actual cost, I think the perception from this bill being so anti-homeowner that it makes more sense to rent might be enough to keep more people renting - which is good for me. 

The depreciation thing is nominal at best.  I'm sure that depreciation schedule only applies to homes bought going forward. So its not like I could switch to that on the homes I already own and leverage scale for that to matter.

Lastly, the pass through income being set to that 25% as opposed to the top bracket of 37% or whatever it is won't affect me at all either. Not for 10 or 15 years or maybe more. As it stands, I'm still showing a loss on my tax return with over 100k in carry forward losses to boot. I don't see that changing any time soon either.  

At some point, when my depreciation runs out and the loans get paid off, then this would come in handy. But by then, I don't think I'll care. :-)

Overall, I think whats really going to happen - as the article alluded to - is that the accountants are going to make a killing when the details of this plan come out and they figure out a bunch of loopholes. And then in 3 more years, when the populous of this country see how ridiculous these republicans are and how everything they've done was geared to the rich and the large corporations, you'll see a tidal wave of democrats voted in and all these rules clawed back.

So it wouldn't surprise me if we don't see a sea change back  again in another 4 years. :-)

So far this is all speculation. Until both houses pass it and the president signs it. We are status Quo.

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