The Tax Bill Broken Down with A Focus on Real Estate

January 18, 2018
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The final GOP tax bill is complex and complicated. There’s a lot to it, and it’s hard to decode. With that in mind, we wanted to offer some insight. We wanted to create a sort of primer for the tax bill.

We conducted research, culled essential facts, and broke down the information for you. We begin our analysis with a basic overview to provide some context. We then highlight simple facts that everyone should be aware of. We round this piece out with a focus on points of interest and concern for the real estate market.

We leave you with some closing thoughts, and tools and resources to help you move forward and plan ahead.

Basic Overview:

The bill is mainly a massive corporate tax cut which drops the rate from 35% to 21% (that’s the largest and most significant cut in the bill). That cut and most of the corporate tax cuts are permanent. Individuals also get an across-the-board cut, albeit relatively small, but those cuts expire after 2025.

You will most likely get a tax cut in 2018. The new law lowers rates across all seven tax brackets, but lowers the threshold for each bracket. This is for taxpayers who file individually and jointly.

Because the individual cuts expire on December 31, 2025, we face another potential “fiscal cliff.” Republicans have said they intend and expect to extend these tax breaks when the time comes.

[Reference: Curbed]

And that is as close as close as we get to editorializing. As stated, the bill is complex, it is polarizing, and has myriad ramifications. We believe the best approach is to present you with unadulterated facts and our sources. We encourage you to continue your own research, as the nuances and complexities of this bill mean its impacts will be varied.

So let’s begin to break it down.

Some Simple Facts:

The below insights were collected and organized to give you a bird’s eye view of the tax bill.

  • The new tax bill was signed into law at the end of December and is in effect as of the beginning of 2018. A Fortune.com piece by John Patrick Pullen states, “when you file your 2017 taxes in April, you’ll already be getting some benefits like lower tax withholding, but other perks won’t show until you file your tax return in April 2019.” We recommend reviewing the Fortune.com piece for quick advice on getting your finances ready to take advantage of the new tax plan.
  • Income tax brackets have been changed under the new law, but there are still seven tax brackets with the top bracket changing to 37% down from 39.6% for 2017. Income ranges, however, have been changed.
  • The personal exemption has been eliminated. To offset this, the standard deduction has been increased. In 2017, the standard deduction for a single taxpayer is $6,500, plus one personal exemption of $4,150 per taxpayer and dependent. The new law, which eliminates the personal exemption, gives us a larger standard deduction for 2018: $12,000 for single filers and $24,000 for joint filers.

[Reference: Business Insider]

  • The bill doubles the exemption amount for estate taxes from $5 million to $10 million ($11.2 million when indexed for inflation).
  • The largest tax cut in the bill is for corporations and it is permanent (the 35% to 21% rate drop), as are other corporate tax changes.
  • Changes affecting individual and joint taxpayers expire after 2025.

[Reference: New York Times]

Points of Interest and Concern for Real Estate

Points of Interest:

The bill introduces concepts that can act as a boon to property owners. Specifically, taxes have been lowered for pass-through businesses. Pass-through businesses — partnerships, S-corporations, and limited liability companies (LLCs) — are corporate entities that allow business income to “pass-through” to the owner, thereby paying a personal income rate, as opposed to a business rate.

The final bill also contains various deductions and breaks that would help real estate developers. According to a Washington Post analysis, tax reform would allow developers to deduct interest expenses for a variety of real estate activities. These activities include construction, management, and property development.

[Reference: Curbed]

Another provision would maintain the Like-Kind Exchange, also known as a 1031 Exchange. This is an exemption that enables property owners to sell at a large capital gain but defer any tax as long as they use the proceeds to buy some other property, but it must be a similar type of property, i.e. “like-kind.”

[Reference: New York Times]

A Bisnow piece written by Lara O’Keefe details 7 key items in the tax bill that could positively affect the real estate industry. The Like-Kind Exchange is among those items.

Points of Concern:

State and local tax deductions (SALT) have been capped at $10,000. Taxpayers can currently deduct what they pay in state and local property, income, and sales taxes from their federal returns.

But the new law caps these deductions — which can be any combination of property, income, and sales taxes — at $10,000.

If you live in a coastal city with high local and state taxes — and particularly if you own a home on which you pay property taxes — this could have a huge impact on your final tax bill, even with the lower rates and doubled standard deduction.

The cap on mortgage-interest deduction (MID) is down to $750,000 from the $1 million previously allowed.

The new cap doesn’t apply to existing mortgages, only new ones. And because of the doubled standard deduction, this may not affect you if you forgo itemizing. A Zillow study estimated that roughly 44 percent of U.S. homes are worth enough for it to make sense for a homeowner to itemize and take the MID under current law. Taking into account the new standard deduction, SALT changes, and MID cap into account, that number drops to 14.4 percent under the new law.

Moody’s Analytics estimates that home prices will drop 4% nationwide compared to projections without the new tax law.

[Reference: Curbed]

A Forbes piece echoed these concerns with an article dedicated to how The National Association of Realtors (NAR) is warning that the bill will cause housing prices to drop.

Closing Thoughts

As we said in the beginning, use this as a jumping off point. It is essential that you conduct your own research. Consult your financial advisor. Be prepared to take advantage of this bill in the ways you can, but be cautious, be wary, and plan for the future. You will find tools and resources below to help you get an understanding of what may lie ahead for you and your family.

 

Tools and Resources:

Tax Bill Calculators

National Association of Realtors

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