Real Estate & the New Tax Reform Bill
Now that the Senate and House of Representatives have come to an agreement on tax reform, it’s time to look at how the bill will impact the nation, particularly for homeowners. As IPX 1031 writes, “the broad-based incentives for capital formation and investment should lift demand throughout the economy and allow real estate to continue its role as a principal driver of economic growth and job creation.”
The Washington-based Real Estate Roundtable outlined a few of the biggest real estate impacts presented by the legislation, a few of which are briefly outlined below:
1. 1031 Exchanges – Like-kind exchanges will continue to be deferrable, but personal property will no longer qualify beginning in 2018.
2. Business Interest Deduction – Net interest expenses will still qualify for deduction, but “taxpayers must elect out of the new interest disallowance regime.” This also extends to hotel operation and management, and REITs and corporations may qualify for exception.
3. Low Cost Recovery Rules – The current regulations will be generally maintained, but recovery periods have increased to “40 years for nonresidential property, 30 years for residential rental property, and 20 years for qualified interior improvements.”
4. Carried Interest – A 3-year holding period has been created “for long-term capital gain treatment with respect to carried interests received in certain types of partnerships, including hedge funds, private equity funds, and real estate,” and is set to begin in 2018.
There are a couple of primary pieces that should be noted for homeowners. The first is a change to the Mortgage Interest Deduction, which will now have a debt cap of $750,000. Second homeowners will still be able to deduct mortgage interest, but those with home equity loans will not qualify for the deduction beginning in 2018. The second is that the capital gains exclusion of a principal residence is maintained, “without extending the length of time a taxpayer must own and use the residence to qualify.”