Tax talk: What the new tax law means in home market

In real estate, we abide by the wisdom that all markets are local. That means that national housing trends — or even what’s happening across town — don’t necessarily dictate how the market in your neighborhood behaves. But that doesn’t mean lawmakers in Washington, D.C., don’t have the power to shake things up a little for individual homeowners, buyers and sellers here in Northern Colorado.

Such is the case with the recently enacted Tax Cuts and Jobs Act for 2018, which has reversed or revised some of the longstanding tax advantages related to owning residential real estate. With the help of insight from the National Association of Realtors (NAR), let’s take a closer look at the some of the tax law’s provisions and how that might apply to you:

Standard deduction

The new law increases the standard deduction to $12,000 for single filers and $24,000 for joint filers. Consequently, many homeowners may no longer gain any benefit from itemizing deductions.

State and local tax deductions

Under the new law, taxpayers can deduct only up to $10,000 in state and local taxes, including property, income and sales taxes . As of 2015, the average state and local deduction claimed on those itemizing income taxes in Colorado was $9,017 — No. 31 nationally — which means minor impact for many in this state. The limit on deductions will be felt the most in the upper end of the market, or in states where property taxes are traditionally high, such as Connecticut, California, Illinois and New York.

It remains to be seen if the implications of the tax law, combined with Colorado’s status as a low-tax state, will be one more enticement for people to relocate to the Rockies.

Mortgage interest deduction

The new law allows homeowners to deduct interest on mortgages up to $750,000, down from a previous maximum of $1 million. The exception — if you took out your loan before Dec. 14, 2017, the $1 million cap still applies. Again, considering the average sale price in Northern Colorado was under $400,000 last year, we don’t see much impact for most homebuyers here.

Capital gains on residential sales

Happily, this provision did not change. You still need to have lived in your home for two out of the past five years to qualify for a capital gains exclusion on the sale of your home. As proposed in an earlier House of Representatives version of the bill, the occupancy requirement would have changed to five out of the past eight years. The status quo (two in five) is beneficial for segments of society who are more apt to move frequently, including young homeowners, members of the military and workers who are subject to corporate or government job transfers. Sounds a lot like Colorado.

Joint filers are not subject to tax up to $500,000 from the sale of their home, and single filers up to $250,000.

HELOC interest deduction

Homeowners can likely no longer deduct interest paid on their home equity line of credit (HELOC). That’s noticeable in markets such as Northern Colorado, where rising values have made it attractive to draw on equity for the likes of home improvement projects, big-ticket purchases and even healthcare expenditures.

Like Kind Exchanges

Another case where Congress was wise to leave things unchanged. Despite efforts to the contrary, the exclusion for the Like Kind Exchange — better known as the 1031 Exchange — continues to allow investors to defer capital gains taxes on the sale of investment property if the proceeds are used to purchase a similar property. However, use of the 1031 deferral for personal property was repealed.

Moving expenses

Except for members of the military, the deduction that once applied to moving expenses has been eliminated.

Looking ahead

Through all the adjustments, we can say that real estate continues to remain attractive as a long-term investment strategy. And considering the complexity of the new tax law, it’s important for home buyers and sellers to consult a trusted Realtor along with a trusted tax advisor to fully understand their individual situation.

Brandon Wells is president of The Group Inc. Real Estate, founded in Fort Collins in 1976 with six locations in Northern Colorado.