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How Does “The Tax Cuts and Jobs Act” Impact Capital Gains on Real Estate In 2018

Capital Gains Tax On Real Estate 2018

Many people are wondering how the newly instituted tax reforms by the United States Congress is going to affect them. From the look of things, many Americans believe they have so much to lose with the implementation of these new tax laws. Due to implementation of “The Tax Cuts and Jobs Act,” the property owners are now subject to the new capital gains tax on real estate in 2018.

There are definitely some pros and cons of the new 2018 tax law for real estate owners. However, many savvy US real estate investors are closely monitoring the impact on capital gains tax with an unflinching attitude. Despite the fact that the new tax laws might not be a great news for many property owners, there is still so much for one to gain from these new 2018 tax laws. People who might be planning to sell their properties, may be wondering how these new tax laws are going to affect them. In this article we shall discuss 17 ways in which “The Tax Cuts and Jobs Act” will impact capital gains tax on real estate in 2018.

What is The Capital Gains Tax on Real Estate?

Capital Gains Definition

People who own property are likely to generate profits from the property. Due to this possibility of generating profit from their property, then they are automatically subject to the capital gains tax. However, capital gains can only be taxed when one is aware of the value of the property when disposing or selling the property. Each time property owners sell their homes at prices that are much higher than what they bought it for, they are subject to the capital gains tax.

Short Term and Long Term Capital Gains

Short term tax-gains are normally applied to properties or investments which are sold within one year of purchase. Long term gains, on the other hand, are applicable to the profits on the investments which are sold after being held for more than one year. The short term gains are normally taxed in a similar manner as regular income. This, in turn, means, that the higher the income generated, the higher the tax-rate. In the year 2012, the long term gains were taxed using a flat rate of 15% of the profit made. Due to the fact that majorities of the real estate are normally held for at least one year, the capital gains for real estate are normally long term gains.

Exemption on Capital Gains Tax

If you are selling a home that you have resided in for several years and the value of the home has risen ever since you purchased it, then you might just be able to take advantage of the capital gain exemption. By taking advantage of this exemption from IRS, you might just be able to save up to $250,000 from the capital gains, upon selling a single property.

Since 1997, up to $250,000 in capital gains ($500,000 for a married couple) on the sale of a home is exempt from taxation if you meet the following criteria:

  • You have lived in the home as your principal residence for two out of the last five years.
  • You have not sold or exchanged another home during the two years preceding the sale.
  • You meet what the IRS calls “unforeseen circumstances,” such as job loss, divorce, or family medical emergency

Not to mention there are some tax benefits of investing in real estate. You have the advantage of deducting certain expenses every time you file your annual income tax. When you get rental income from the rental of a residence unit, there are some expenses you may deduct on your tax return. These expenses include mortgage interest, property tax, operating expenses, depreciation, and property repairs.

How Much Is Capital Gains Tax on Real Estate?

Capital Gains Tax On Real Estate

In majority of the cases, the short term gain owners are going to end up paying more compared to the long term capital gain owners. Moreover, homeowners who manage to bring less income each year might not have to pay the long term capital gains on real estate. The capital gain relies entirely on how much taxable income that one brings home at the end of the day and also on the period in which the property has been in your possession. It is important to note that one may own a property but he or she may not have to pay capital gain tax. Furthermore, capital gains tax only applies when one decides to sell the property.

Sell When the Taxable Income is Very Low

As discussed above, one’s taxable income has an impact on the real estate capital gains. Thus, the lower one falls in the tax bracket, the less capital gains tax one will be required to pay, even when one is selling assets, which has changed into capital gains. Nonetheless, how lower does one need to be in the tax brackets? It is evidently clear that you will not wait until retirement to part ways with an asset. If you are still far from retirement, you still may be able to shrink your taxable income. A great option is transferring your money into a retirement savings account before the dawn of the tax season. Moreover, you can also open up a health savings account in case you have a highly-deductible health insurance plan. Money on the HAS cannot be taxed. This, in turn, means that you can easily make some of the money that you make nontaxable.

How Does The New 2018 Tax Law Impact Capital Gains on Real Estate?

Here is a breakdown of everything that you need to know about the impact of the new 2018 tax law on capital gains tax on real estate:

  1. Standard deduction has been doubled to $12,000 for single filers and $24,000 for married filing jointly.
  2. Lowering of the mortgage deduction, which the National Association of Realtors said is “a direct threat to homeowners and consumers. Not only would millions of homeowners not benefit from the proposal, many would get a tax increase.”
  3. Change in the rules regulating capital gains tax on real estate could slow the market even further.
  4. Homeowners could lose substantial equity from the more than 10% drop in home values likely to result from the new tax laws.
  5. The final bill raised the final deduction amount to the interest on the first $750,000 borrowed. The deduction for interest is capped at $750,000 for mortgage loan balances taken out after Dec. 15 of last year.
  6. The limit is still $1 million for mortgages that were established prior to Dec. 15, 2017.
  7. Existing mortgages will be grandfathered in, with the lower deduction applying to new loans,
  8. Households can exclude up to $500,000 in capital gains from the sale of a home if they’ve lived there five out of the last eight years.
  9. Mortgages on second homes can be included toward a household’s mortgage deduction in the current bill.
  10. Under the new law, there’s 100 percent bonus depreciation for property placed in service after Sept. 27, 2017, and before 2023, 80 percent for 2023, 60 percent for 2024, 40 percent for 2025 and 20 percent for 2026.
  11. Alternative Depreciation System (ADS) recovery periods are 40 years for non-residential property, 30 years for residential and 20 years for improvement property.
  12. There is a $10,000 limit for property tax deduction which applies to individuals not businesses.
  13. Exclusion of local income and sales tax deductions for non-corporate taxpayers.
  14. Under the new law, for property placed in service, you can deduct up to $1 million starting in 2018. The limit is reduced dollar-for-dollar if $2.5 million in property is placed in service during year.
  15. The estate exemption doubles to $11.2 million per individual and $22.4 million per couple in 2018.
  16. The legislation calls for a significantly lowered corporate tax rate and reduced tax rates for individuals with higher standard deductions but institutes caps on mortgage interest deductions and the deduction of state and local taxes.
  17. The individual cuts expire in 2025, but the corporate cuts are permanent.

New Capital Gains Tax Rates: Conclusion

At the moment, there appears to be a little bit of confusion when it comes to federal taxes. Majority of taxpayers are worrying about how much they will be able to gain by next year. In case you are more than ready to part ways with your home, then you should not let the capital gains tax stand in the way or intimidate you. You may also click on the link to read our blog on tax benefits of investing In Real Estate

References:

https://www.cnbc.com/2018/02/16/10-tax-changes-you-need-to-know-for-2018.html  https://www.accountingtoday.com/opinion/pros-and-cons-of-the-new-tax-law-for-real-estate-owners


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