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Tax Reform Act – Impact on Owners of Residential Real Estate

Tax Reform Act – Impact on Owners of Residential Real Estate
Ines Zemelman, EA
27-Dec-17

On December 22, 2017, President Trump signed the Tax Reform Act into law. The Act includes several major changes to many areas of the IRS Code impacting taxpayers who own real estate. Most of the changes are effective January 1, 2018.

Changes are universal and apply to real estate properties located in the US or abroad. The changes affect every individual required to file a US tax return, whether he/she is a US citizen, green card holder or foreign alien investing in US real estate.

Provisions Impacting Residential Real Estate - The Good, the Bad, and the Ugly

Good

  • Capital gains exclusion remains: After much of the debate, capital gains from selling main home remained unchanged. Owners still can exclude up to $500,000 for joint filers or $250,000 for single filers for capital gains when selling a primary home. The ownership and residence requirements also remained untouched: to qualify for exclusion the homeowner should have lived in the residence for two of the past five years. An earlier proposal would have increased that requirement to five out of the last eight years but it was struck down.
  • Existing Homes Mortgage interest deduction: The $1 million limit will remain for homes that were purchased before Dec. 15 of 2017. Mortgage interest deduction on second home that was scheduled to be entirely eliminated is still allowed in the final bill, subject to the total mortgage interest deduction limitations described below. 

Bad

  • The Act caps the deduction for state and local property, and income and sales taxes to $10,000 per year.
  • The Act also limits the deduction of interest incurred on debt used to acquire, construct or improve a principal residence to interest on up to $750,000 of debt (down from $1,000,000).
  • If second home not used as a rental property carries mortgage, the total amount of loans on both homes allowed for interest deduction cannot exceed the $750,000 limit.

Ugly

  • Foreign real property taxes are not allowed for deduction.
  • Deduction of interest on home equity debt will be eliminated on new and existing home equity loans.
  • Existing loans are not grandfathered. The deduction will be eliminated entirely starting from January 1, 2018.

All the changes described above apply only to properties not used for rental business. Owners of properties used for rental business are in a much better position.  See more here.

 

Ines Zemelman, EA
Ines Zemelman, EA
founder of Taxes for Expats