As of November 20th, there is no new signed law. However, we do have a tax plan that has passed the House. Next up is the Senate and then the President’s signature.
This bill is so huge, and so sweeping, that it’s time to start looking at strategies even though we don’t have the fine tuning on this done yet.
First, let’s look at your home. What tax breaks do you still have and which will you lose via the house bill?
(1) Capital gains exclusion when you sell. Currently, when you sell your primary residence at a gain, you will get an exclusion on the capital gains tax if you’ve lived there long enough. If you’re single, you get an exclusion of $250,000. If you’re married, filing jointly, you get an exclusion of $500,000. Under current law, you need to live in your home for 2 of the previous 5 years. The new law says you have to live in it for 5 out of the previous 8 years.
(2) Property tax is deductible up to $10,000. However, your standard deduction is almost doubled so you may find that you won’t itemize any more. Most itemized deductions are gone.
(3) HELOC (Home Equity Line of Credit) loan interest will no longer be deductible.
(4) Your primary residence interest deduction will be capped at the interest on up to $500,000 of acquisition indebtedness.
For the capital gains exclusion, the strategy is pretty simple. Live in your house longer. Some of our clients have built up a portfolio of single family homes and then when they retire, they simple move to take out the money tax-free. That’s still possible, it’s just going to take longer to achieve that.
Regarding the property tax deduction, this is really just the tip of the iceberg.“The only deductions left are a reduced mortgage interest, capped property tax and charitable donations. Everything else you’re used to – medical expenses, unreimbursed employee expenses, tax prep fees, casualty losses and the like – are gone. If you’ve always taken large itemized write-offs, plan now for how you’re going to handle this in 2018. In most cases, the answer is to start a small business if you’re currently an employee. If you already have a business, make sure your records are very clearly separated for business expenses with business and personal expenses with your personal account. Otherwise, you’re going to lose a lot of deductions. In a lot of cases, your medical expenses can be picked up with a MERP (medical expense reimbursement plan). The MSAs (medical savings plans) will be gone. The only real game left in town is the business MERP. Check to see if you qualify.
In summary, plan for more taxes if you’ve always had a lot of itemized deductions. Start a business, if you don’t have one already. If you do, maximize your business deductions.
We talk about strategies to do that at our twice monthly group coaching. You can learn more at https://www.ustaxaid.com/coaching-program/
Your HELOC interest is no longer deductible. If you have used the money to finance investments (business, real estate or paper assets), it may be deductible. Business interest has a new limitation with the new tax plan. You can’t take a deduction for more than 30% of the taxable income before depreciation and amortization. Real estate deductions will stay the same, but that also means the same passive loss limitations may apply. Investment expenses are limited, as before, based on how much investment income you have.
Keep very clear records if you borrow money from your home for your business, real estate and/or paper investments.
One more change for homeowners: Your mortgage interest deduction has been limited to interest on up to $500,000 in acquisition indebtedness. The term “acquisition” is an important one. If you buy your home, for example, for $200,000 and get a loan for $180,000, then later refinance when the value goes up, you may not have the deduction you think. Let’s say it’s now worth $500,000 and you pull out $400,000. Even though the loan is under $500,000, you are limited to the interest on the initial acquisition indebtedness. It’s not all deductible.
There are some changes that will impact investors as well.
AMT (alternative minimum tax) has plagued real estate investors due to penalties for how depreciation is calculated and alternative methods for calculating capital gains tax when properties are sold at profit. It’s often a surprise to taxpayers when they discover they don’t owe much regular tax, but owe a lot of AMT. That is gone. Forever. It will certainly make my life a lot easier and help my clients breathe a little easier.
I’m not a fan of the other change. The rehabilitation tax credit, historic tax credit and ADA accessibility tax credit are gone. That means you don’t get credit for rehabbing old and historic properties or for adding access to your property in compliance with ADA.
That’s just the beginning. There are a lot more changes coming. Please check back to USTaxAid.com frequently to catch the latest in strategies.