The 2018 tax code changes are the first major tax code overhaul in 31 years. Here’s what homeowners and real estate investors need to know.
2018 Tax Code Changes
Mortgage Interest Deduction
In expensive states like California, the mortgage interest deduction is a significant reduction in tax liability. Beginning in 2018, the mortgage interest deduction is capped at $750,000 of debt. You can only deduct the interest on up to $750,000 of debt.
This 2018 tax code change affects new loans taken out after 12/14/17. Current loans of up to $1,000,000 are grandfathered and are not subject to the new $750,000 cap. Homeowners may refinance mortgage debts existing on 12/14/17 up to $1,000,000 and still deduct the interest, so long as the new loan does not exceed the amount of the mortgage being refinanced.
Like the new cap for primary residence mortgages, the new mortgage deduction limit is $750,000. You can only deduct the interest on up to $750,000 of debt.
Home Equity Line of Credit (HELOC)
Prior to 2018, you could deduct all HELOC interest if the HELOC limit was $100,000 or less. The 2018 tax code has kept the $100,000 limit, but also requires that all deductible interest must be for proceeds used to substantially improve the property.
State and Local Tax Deduction
This 2018 tax code change affects most, if not all, Californians who itemize deductions. Before 2018, you could itemize all of your state property, income, and sales tax. Today, this amount is limited to $10,000. In what appears to be a marriage penalty, this $10,000 limit applies to both singles AND married couples.
While not directly related to real estate, here are other significant 2018 tax code changes:
- Personal exemptions have been eliminated.
- The standard deduction has increased, from $6,350 to $12,000 for individuals, and from $12,700 to $24,000 for married couples.
- The child tax credit has increased from $1,000 to $2,000 for each child. The age limit stays the same, at 16 and younger. The maximum income to claim the child tax credit has increased significantly to $500,000 for all filers.
Moving Expense Moving and Deduction
Prior to 2018, you could deduct moving expenses if you were moving because of a job change. Starting this year, the only people who can take this deduction are active duty military with orders to move.
What Hasn’t Changed in 2018
Capital Gains Exclusion
The final version of the 2018 tax code removed any changes to the capital gains exclusion. You can still avoid paying capital gains taxes on real estate sales. You must reside in the property for at least 2 of the last 5 years, and the excluded gain is limited to $250,000 for singles, and $500,000 for married couples.
If your net gain is greater than these limits, the amount that exceeds the limit is subject to capital gains tax. The capital gains tax rate is generally 15% maximum, but 20% for those in the highest tax bracket.
Depreciation Recovery Periods – For Investors
None of the depreciation recovery periods for investment properties has changed. The periods remain the same:
- Residential rentals – 27.5 years
- Non-residental real property – 39 years
- Qualified* improvements – 15 years
*Note: The 2018 tax code replaces separate definitions for qualified Restaurant, Leasehold, and Retail improvements with one definition of “Qualified Improvement Property.”
The depreciation “recapture” rate for net capital gains stays the same as before, at 25%.
For More Information
Please consult your tax advisor to learn how the 2018 tax code will affect your tax liability.