With passage of the GOP tax legislation, tax season started early for accountants across the nation. This month, I've invited my client and certified public accountant, Steve Kopff, to share his insights and answer some frequently asked questions about the newly passed law. As my long-time accountant, Steve also works with many of my clients – saving us thousands, if not millions of dollars to date.
Given the new tax plan is still in flux, we’ve asked to Steve to guest blog every quarter through the end of the year to provide updates and strategies on how to maximize your real estate investments. Thank you Steve! -- DJH
When does the tax bill go into effect?
The “Tax Cuts and Jobs Act” became effective December 31, 2017, expiring December 31, 2025. However, there are some short-term provisions. For instance, if a purchaser has initiated into a contract before December 15, 2017, and the home is scheduled to close before January 1, 2018 - but doesn't, the buyer has until April 1, 2018, to take advantage of the maximum allowable deduction of $1M. For people entering into contracts after December 15, 2018, the new laws apply, capping deductions at $750K for married taxpayers filing jointly, or $375K apiece for married taxpayers filing separately.
How does the new law affect my mortgage interest deduction?
If you plan on staying put, e.g. not buying or selling, nothing has changed – you’re grandfathered in. And, you can refinance your existing loan as long as you don’t borrow more than the original mortgage, to lower your interest rate, for example. Additionally, if you plan on pursuing a home equity line of credit (HELOC) for home improvement projects, the entire amount is deductible, however, you can’t use this money for other things, like paying your children’s tuition – and still claim it as a deduction.
The tax bill certainly favors real estate investors, rental property owners, or others investing in short-term rental (STR) properties like AirBnBs. Many of the new law’s limitations do not pertain to real estate investment – a nice perk for the deep-pocketed or those who already own these types of properties, along with cash only sales.
Renters. Given the fluidity of the tax laws, prospective sellers may opt out of the market – further limiting housing inventory and driving rental prices higher. If you’re looking for a good place to invest, you still can’t go wrong with Bay Area real estate.
The new law caps the combined deduction of your property tax and state and local taxes to $10,000. Again – there are ways around this – especially for small businesses who operate from home. Here, one tax strategy allows you to allocate some of the mortgage and property taxes to your home office schedule, which is not subject to the new limitations, allowing a taxpayer to deduct more of their property and state taxes that might be lost to the $10K limitation.
Also, net income from pass-through entities like S Corporations, LLCs, partnerships and sole proprietorships, get a 20% deduction on their income, So not only can you write off more of your interest and property tax, but 20% of your net income is tax-free.
How Does the Law Specifically Affect California
The general consensus is these new laws hurt Blue states by limiting the amount of state and local income and property taxes that can be deducted. Currently, Democratic legislators at the state level have proposed allowing taxpayers to treat as much of their state income taxes as “charitable donations” as they choose. Since donations have much higher limitations, most taxpayers would be allowed to write off all of their state income taxes in this instance.
It should also be noted that California does not necessarily accept all tax changes enacted at the federal level. I suspect California will not adopt changes to the limitations on mortgages, or the cap on the amount of deductible property tax. These changes provide no benefit to California because of the pressure to lower property taxes (thereby reducing state tax revenue) making it less attractive to buy a home in California.
It’s my duty to exploit these loopholes for my clients.