WHAT TAX REFORM MEANS FOR THE REAL ESTATE INDUSTRY
The following information from the American Land Title Association outlines key
provisions of the Tax Cuts and Jobs Act Affecting Real Estate and ALTA Members.
TAX RATE REDUCTIONS
Maintains seven individual income tax brackets, but lowers most rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
The final bill retains the current-law maximum rates on net capital gains (generally, 15% maximum rate but 20% for those in the highest tax bracket; 25%rate on “recapture” of depreciation from real prop-erty).
Lowers the corporate tax rate to 21% (from 35%).
MORTGAGE INTEREST DEDUCTION
The final bill reduces the limit on deductible mort-gage debt to $750,000 for new loans taken out af-ter Dec. 14, 2017. Current loans of up to $1 million are grandfathered and are not subject to the new$750,000 cap. Neither limit is indexed for inflation.
Homeowners may refinance mortgage debts existingon Dec. 14, 2017, up to $1 million and still deductthe interest, so long as the new loan does not ex- ceed the amount of the mortgage being refinanced.
The final bill repeals the deduction for interestpaid on home equity debt through Dec. 31, 2025. Interest is still deductible on home equity loans (or second mortgages) if the proceeds are used to substantially improve the residence.
Interest remains deductible on second homes, but subject to the $1 million/$750,000 limits.
DEDUCTION FOR STATE AND LOCAL TAXES
The legislation allows individuals to deduct an ag-gregate of $10,000 of state and local government taxes (SALT) for property, sales or income tax. Previ-ous bills limited the SALT deduction to only propertytaxes. This $10,000 limit applies for both single and married filers and is not indexed for inflation.
The final bill also specifically precludes the deduc- tion of 2018 state and local income taxes prepaid in2017.
Nearly doubles the standard deduction from $6,350 ($12,700) under current law to $12,000 ($24,000) for individuals (married couples).
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ALTERNATIVE MINIMUM TAX
Retains the Alternative Minimum Tax (AMT), butincreases the amount of income exempt for individ-uals. Repeals the corporate AMT.
The final bill retains the current Section 1031 Like Kind Ex-change rules for real property. It repeals theuse of Section 1031 for personal property, such asart work, auto fleets, heavy equipment, etc.
The final bill includes the House and Senate lan- guage re-quiring a three-year holding period to quali- fy for current-law (capital gains) treatment.
The legislation creates a new tax deduction of 20 percent for pass-through businesses. For taxpayerswith incomes above certain thresholds, the 20 per-cent deduction is limited to the greater of: (a) 50%of the W-2 wages paid by the business, or (b) 25% of the W-2 wages paid by the business, plus 2.5% ofthe unadjusted basis, immediately after acquisition, of depreciable property (which includes structures, but not land). REIT dividends and distributions from publicly traded partnerships are not be subject to the wage restriction. Estates and trusts are eligiblefor the pass-through benefit. Income from certain specified services businesses is ineligible (e.g., health, law, financial services, etc.).
Example. A business purchases an office building for$10 million ($7 million attributable to the structure, $3 million attributable to the land). The building generates annual rental income of $500,000. Themaximum allowable pass-through deduction wouldbe $100,000 (20% of $500K). Even if the busi-ness paid no wages, the business would qualify for the full deduction because 2.5% of $7 million is$175,000. For a taxpayer subject to the maximum 37% tax rate, the rental income would be taxed atan effective rate of 29.6%.
AFFORDABLE CARE ACT
Eliminates individual mandate penalty associat-ed with the Affordable Care Act (ACA) beginning in 2019.