3 Ways Tax Reform Affects Your Real Estate Investments
The Tax Cuts and Jobs Act of 2017 instituted some of the most dramatic changes to the financial landscape in the United States in over 30 years. These adjustments to the IRS code affects everyone who earns and spends money in this country.
What changes can real estate investors expect to see from the new legal standards?
Higher Standard Deduction, Less Itemized Deductions
Before the reforms, single tax filers were allowed a standard deduction of $6,350. Married couples filing jointly were given $12,700. The standard deduction is the amount of income you can earn before any income taxes are applied. If a married couple made $50,000 in one year, they would only pay taxes on $37,300. With the new laws, single filers receive a $12,000 deduction and married couples get $24,000.
However, with the increased standard deduction comes significant decreases in itemized deductions. Many smaller real estate investors depend on tax credits for homebuyers to make their purchases more profitable. Those have been removed from the list of approved deductions. Real estate investors need to adjust their strategy to take full advantage of new tax trends. Rather than focusing on flipping homes for profit, investors may consider holding on to properties and leasing them as rental units.
Mortgage Tax Deduction Changes
Homeowners who live in their primary property are still allowed to deduct a portion of the interest paid on their monthly mortgage. However, those who have taken out home equity lines of credit are no longer able to claim a deduction for those interest payments.
This is a big change for some real estate investors. It's a common strategy to use home equity lines of credit to finance other projects. Without the extra deduction, these loans are still a great option for quick cash. However, investors will take more time to realize profits with this strategy.
Decrease In State and Local Tax Deductions
Investors use state and local tax deductions to increase their return on investment. Under the new rules, property owners are limited to a $10,000 maximum deduction. Real estate investors who operate in high-income areas will see a significant increase in their yearly tax bill. The $10,000 limit is unlikely to offset the high price of property taxes in places like California and New Jersey. Newer investors who don't hold a lot of properties can consider buying in markets with lower state and local tax rates. Those who are currently invested could sell some of their lower-producing properties to lighten the burden on their tax bills.
The new tax laws are a challenge for real estate investors. But with some planning and the right information, your business can still produce a generous profit.
Be sure to consult with a trusted mortgage advisor with Bond Street Mortgage to find out about the best financing options for your situation.
Frequently Asked Questions
The standard deduction increased to $12,000 for single filers and $24,000 for married couples filing jointly, nearly doubling the previous amounts.
The reform significantly reduced itemized deductions by removing certain tax credits for homebuyers, affecting smaller real estate investors.
Yes, homeowners can still deduct interest on their primary mortgage, but interest on home equity lines of credit is no longer deductible.
Investors can no longer deduct interest from home equity lines of credit, making this financing option less immediately profitable but still useful for quick cash.
Investors are encouraged to hold properties as rental units rather than flipping homes to better leverage the new tax environment.
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