11 Jan Tax Reform – How Will It Affect the Real Estate Market?
LOS ANGELES, CA. – As a uniquely specialized full service brokerage and property management firm, MW Real Estate group closely monitors all market fundamentals and extrinsic factors affecting the commercial real estate investment sector. This includes the recent tax reform (Tax Cuts and Jobs Act) which were approved by congress.
It’s been over 30 years since we’ve seen real tax reforms in the United States and every person who owns rental properties or primary residences (especially in California) wants to know how the coming tax reforms are going to affect their businesses and financial lives.
In this article, we will break down how the new tax laws will affect the real estate market including investors both new and old who are thinking about investing in rental properties this year.
How Tax Reform Affects Primary Residence Homeowners
Mortgage Interest Debt – Any mortgage interest debt which was incurred before 12/15/2017 will still be eligible for the home mortgage interest deduction (up to $1,000,000). Mortgage interest debt incurred after December 2017 is going to be limited to no more than $750,000.
HELOC – Starting this year, mortgage interest debt incurred from a Home Equity Line of Credit (HELOC) is no longer going to be eligible for home mortgage interest deduction.
Standard Deduction – The standard deduction has been raised to $12,000 for people who are single and $24,000 to couples who are filing jointly. Many economists feel that this could mean fewer people buying homes in 2018 because they will have less of an incentive to move from renting to buying.
State and Local Taxes – Thanks to the new tax laws, homeowners may deduct a maximum of $10,000, instead of deducting all of their taxes. This has shocked many homeowners in California and some economists are predicting that we could see a drop-in hoe values as a result of this tax reform.
How Tax Reform Will Affect Investment Property Owners
1031 Exchange – Thankfully, the 1031 exchange is going to remain in effect for the real estate market and owners will be able to defer their capital gains taxes using this tax deferment strategy which has been a major part of the tax code since 1921.
The big change however to the 1031 exchange is that it can no longer be applied to anything else outside of real estate. This means that owners or investors who purchase new aircraft, collectibles, or other big-ticket items will not be able to defer paying taxes on those items in 2018.
“Carried Interest” – Any investor who wishes to qualify for the lower capital gains tax rate will have to assets for three years instead of one year as was common under the previous tax code.
Tax Write-Offs – Some property owners (ranchers and farmers) will be able to write off their investment in personal property (immediate expensing). This new tax law is expected to last for a period of five years but once it expires there’s been talk that these owners may face much higher taxes once this provision expires.
Net Interest Expense – Owners will still be able to deduct their net interest expense but they have to opt out newly implemented interest dis-allowance tax rules.
Depreciation Rules – Current depreciation rules are going to continue but some owners who want to use the real estate exception to the current interest limit must depreciate their rental property under longer periods (40-years for non-residential properties and 30-years for residential rental property.
State and Local Taxes – Do you own a rental property in Los Angeles or elsewhere in Southern California? You will still continue to be able to deduct property taxes.
20% tax credit for rehabilitating old structures – Any investor who plans on renovating a structure which has been historically certified will enjoy a 20% tax credit but they must claim that credit over a period of five years.
Get Los Angeles Property Management
For professional Los Angeles property management contact MW Realty LA by calling us at (213) 927-2117 or click here to connect with us online.