While the Tax Cuts and Jobs Act (TCJA) was signed into law in December 2017, this is the first tax year under the new tax laws. Whether you rented, purchased, or sold real estate in 2018, changes in the tax code will have implications for gross taxable income, eligible deductions, and exemptions that can be taken.
Standard deductions increase – Taxpayers have the option to take the standard deduction or to itemize their tax filing. The new increase in the standard deduction—twice the previous amount—is now $12,000 for individuals and $24,000 for people filing jointly. This change impacts homeowners. You need to determine if your total itemized write-offs for the year will be greater than the higher standard deduction for it to have a tax advantage for you. For many people, the increased standard deduction removes the tax incentive of buying rather than renting (if the reason for buying is based upon tax advantage). Keep in mind, though, that this is not going to always be the case. You’ll need to evaluate your own situation before deciding how to proceed.
State and local property tax deductions – Before the tax code change, you could deduct all state and local property taxes on your federal filing. There is now a cap of $10,000 for these deductions.
Mortgage interest deductions – Prior to the law change, you could deduct up to $1 million in mortgage debt interest on your taxes. That amount has been reduced to $750,000 for any home loan taken out after December 15, 2017. Older mortgages than that have been grandfathered. What about if you have a mortgage on a second home? The same $750,000 limit applies.
Home equity loans – The rules for home equity loans have changed as well. Under prior law, you could deduct the interest on up to $100,000 of home equity debt, no matter what you used the monies for. TCJA now only allows you to deduct interest on home equity debt that is used to acquire or improve your residence up to $750,000 overall.
Rental properties – Unlike property you hold for your personal use (i.e., your home), mortgage interest and state and local real estate taxes on rental properties can still be deducted and are not impacted by the personal residence limitations. Furthermore, depreciation, maintenance and repairs, utilities, association fees, and all the other typical operating expenses for rental properties can still be written off.
Things get complicated if your rental property generates a tax loss. You’ll need to know about (or ask a professional to explain to you) passive activity loss (PAL) rules. These rules stipulate that you can’t have passive losses in excess of passive income unless you have sufficient gains/income, or you sell the property that produced the losses. To further make things dicey, TCJA imposes a new loss deduction rule that is applied after applying PAL rules—you cannot deduct an excess business loss in the current year. Long story short, it behooves you to speak to someone qualified to assess your unique situation and advise you on what’s in your best interest.
While this is a very general summary of many of the changes made in TCJA, it is always in your best interest to consult with a trained professional to address how the new tax law will impact you.