Newport Beach, Costa Mesa, Orange County and all California homeowners – and potential homeowners – have some significant tax changes to consider and plan for in 2018. H.R. 1, known as the Tax Cuts and Jobs Act, which both houses of Congress passed on December 20, 2017, contains a large number of provisions that affect individual taxpayers, especially homeowners. Here as some of the key provisions impacting homeowners and potential homeowners:
As of January 1, 2018 – single or married – you are now limited to a deduction of $10,000 for all state and local taxes, including state sales tax and local property taxes. If you itemize your deductions and own real property, odds are you exceed the new limit of $10,000. This could significantly increase tax liabilities (if not offset by other provisions of the act).
The Mortgage Interest Deduction – for new mortgages only (old mortgages are ‘Grandfathered’ in) – is lowered to $750,000 (from $1,000,000). This means that, regardless of the size of your loan, you can only write off interest on the first $750,000 of the loan. (Note – this change does not affect home acquisition mortgages before Dec. 16, 2017 as long as the home purchase closed before April 1, 2018.)
Likewise, the Mortgage Interest Deduction on a second home was similarly lowered to $750,000 (from $1,000,000).
Lastly for mortgages and loans, deductibility for a Home Equity Line of Credit (often called a “HELOC”) remains capped at $100,000; but now only qualifies if the funds were used to substantially improve the property. In other words, you can still deduct up to $100,000 of a HELOC, but only if used to improve the home (i.e. kitchen remodel, bath remodel, landscaping, etc.; NOT to fund a vacation, pay off credit card debt, etc.).
Fortunately, there was no change in the Capital Gains Exemption on the sale of a primary residence (currently at $250,000 for single filers, $500,000 for married couples…. This means that if a married couple sells their home and makes a profit of $650,000, they will only pay Capital Gains taxes on the $150,000 difference (i.e. $650,000 – $500,000 = $150,000). A single filer, selling their home for a profit of $200,000, would pay no Capital Gains taxes (i.e. $200,000 – $250,000 = -$50,000 [sorry, no carry over]).).
The 1031 Exchange was limited to real property only, i.e. only real property can be exchanged for real property. The rule used to allow other forms of investments, such as artwork or gold, to be converted to real estate, and vice versa. Now the rule only applies to real property.
There are of course many other significant changes. Talk with you tax advisor before proceeding as there are many variables that may impact your individual situation. Moreover, there are likely numerous additional strategies to review and discuss with your tax advisor.
- H.R. 1
- Revenue & Taxation Code Sec. 2512
- Journal of Accountancy, “What the tax reform bill means for individuals”, by Alistair M. Nevius https://www.journalofaccountancy.com/news/2017/dec/tax-reform-bill-changes-for-individuals-201718070.html
- LA Times, “Tips for Paying Property Tax Early Before the New Law Kicks In” by Andrew Khouri
- Fortune.com, “President Trump Is About to Sign the GOP Tax Bill. Here’s When the Cuts Will Start” http://fortune.com/2017/12/20/gop-tax-bill-cuts-start/
- California Association of REALTORS®, “Tax Reform Law Chart: Prior Law vs. New Law,” December 28, 2017.
– Devin Lucas
Devin R. Lucas is a real estate attorney, broker and REALTOR® in Newport Beach. Mr. Lucas is on the panel of real estate mediators available via the California Association of REALTORS® Real Estate Mediation Center for Consumers. Mr. Lucas is a past Director of the California Association of REALTORS®, a current Director of the Newport Beach Association of REALTORS®, an active member of multiple local and statewide REALTOR® committees, the 2018 Secretary and Treasurer of the Orange County Bar Association’s Real Estate Section, the past Chair of the Orange County Bar Association’s Solo and Small Firm Section, and was named the “2014 REALTOR® of the Year” by the Newport Beach Association of REALTORS®.
Mr. Lucas is a Broker-Associate with the Newport Center Office of Villa Real Estate, a leading luxury brokerage, specializing in Newport Beach, Costa Mesa and Orange County coastal communities.
Read Mr. Lucas full bio here.
Lucas Real Estate
Real Estate Attorney | Real Estate Broker | REALTOR®
lucas-real-estate.com | firstname.lastname@example.org | BRE No. 01912302
949.478.1623 office | 888.667.6038 fax
2901 West Coast Highway Suite 200
Newport Beach | California | 92663-4023
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