The Tax Cuts & Jobs Act: New Rules for Real Estate Owners

The new law presents several opportunities related to real estate that taxpayers would be wise to consider.

The Tax Cuts and Jobs Act was signed into law on December 22, 2017, bringing significant changes to the U.S. tax code. While most changes took effect on January 1, 2018, tax filing for the 2017 calendar year is unaffected. Additionally, many of the law's provisions are only temporary and are due to expire on December 31, 2025.

For homeowners and real estate investors alike, the new law includes a number of provisions that may have a direct impact on your tax situation:

Planning Opportunities

The new law presents several opportunities related to real estate that taxpayers would be wise to consider.

To maximize the benefit of the home mortgage interest deduction, consider converting your amortized mortgage to an interest-only mortgage. In an interest-only mortgage, the entire payment is considered to be interest and is therefore fully deductible, assuming you meet the other requirements. If you can increase the amount of interest you pay on the mortgage, it may be possible to exceed the standard deduction and take advantage of additional tax savings by itemizing deductions — especially when you add in any charitable gifts on top of your state and local income taxes and real estate tax.

For example, a $750,000 all-interest mortgage would result in an annual interest charge of $22,500. If you can claim the full $10,000 deduction for state and local income and property taxes, and make a $5,000 charitable contribution, itemizing could get you a total deduction of $37,500, which is $13,500 more than the $24,000 standard deduction for married couples who file jointly.

Taxpayers should keep clear records of how their home equity loan proceeds are used to ensure they can prove that the money went to acquiring, improving or constructing a primary or secondary residence. The IRS may provide a form to facilitate the tracking of these proceeds, so taxpayers will want to have as much information on hand as possible to establish the validity of the deduction.

Make the most of any unutilized portion of your gift and estate tax exemption by giving to the next generation. The increase in the exemption amount is, as of right now, only temporary and set to expire in 2026. While it is in effect, it provides a great opportunity to transfer a residence, such as a second home or a vacation home, to children without incurring a significant tax bill or potentially disrupting existing wealth and estate plans that have been designed for the smaller exemption limit. If you would like to retain possession of the property, consider borrowing against it — perhaps by taking out a mortgage or securing an investment credit line — and gifting cash instead.

A Good Time to Reassess

Due to the speed with which the law was enacted, there are many uncertainties in the interpretation and application of the changes. However, homeowners and their advisors must be proactive in ensuring they understand how these changes may affect them, and should seek the counsel of a tax attorney or wealth strategist with experience in this area. That way, they can feel confident that they are taking advantage of all the opportunities afforded to them by the new law and do not make a mistake that could lead to unnecessary costs.

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