Archive for the ‘Real Estate Taxes’ Category

How Will the New Tax Law Affect You?

Tuesday, January 30th, 2018
New tax law

The new tax law: the Tax Cuts and Jobs Act. How will it affect you as a Brooklyn homeowner?

A New Year brings with it new possibilities and changes, even in the world of real estate. Have you heard about the new tax law: the Tax Cuts and Jobs Act? Whether or not you have, you most likely won’t notice the changes that will affect you until you file your taxes in 2019. You may see changes made to next month’s paycheck because of this new tax law and its new tax rate deductions, however.

New Tax Law: How Its Policies Could Affect You as a Homeowner

  1. Capping Mortgage Interest Deduction

On December 15, 2017, the new tax law, the Tax Cuts and Jobs Act, reduced the amount of mortgage interest rate deduction for new loans from $1,000,000 to $750,000. If you took out a loan before December 15, 2017, you are grandfathered into the previous tax policy.

If you want to refinance your existing mortgage balance and still deduct the interest, you can do so up to $1,000,000, but your new loan cannot exceed the amount of your existing mortgage balance being refinanced.

The capping of the mortgage interest deduction poses a risk to large urban areas with high-priced homes such as those here in New York as well as in Washington, D.C., California, Hawaii, and Massachusetts.

The effect of these changes will not be noticed until you sell your home. But the newly purchased property would then come under the new regulations of the new tax law policies.

By limiting your buyer’s purchasing power and capping mortgage interest rate deduction, the growth of your home’s value could be slowed. This could then affect the profits you as a longtime homeowner would hope to gain when trying to sell.

  1. Introducing the New SALT Deduction Limit

Whether filing as an individual or married couple, taxpayers can itemize deductions up to $10,000 for their total state and local property taxes and income or sales taxes in the final bill. The cap is the same for both.

The new SALT limits will impact households that pay more than $10,000 in combined state and local taxes each year. Alexander Casey, Zillow Group Policy Advisor, says, “On one hand, taxpayers who still itemize deductions and whose total state and local tax liability exceeds $10,000 will get a smaller tax break; however, for other households, the continued availability of those deductions, even if they are capped, may be the deciding factor between whether or not they itemize deductions. This matters a lot in areas where SALT deductions were a relatively more significant reason for itemizing – areas with lower home prices, but higher taxes (e.g., upstate New York, Southern New Jersey, Inland California).”

In the law preceding this new tax law, the SALT deduction was unlimited.

Realtor.com® Senior Economist Joseph Kirchner, Ph.D. says, “The new SALT limit will have the greatest impact on states that provide a large number of services to their citizens by, first, reducing the benefit of tax cuts by disallowing the full value of this deduction, and, second, compounding the issue of the standard deduction vs. the mortgage interest rate deduction.”

  1. Preserving the Exclusion of Capital Gains

The previous law stated that homeowners must live in their home for two out of the past five years in order to qualify for the capital gains exclusion. This tax policy hasn’t changed.

Casey also says, “About 10 percent of home sellers last year sold their home after living in it between two and five years. Keeping the status quo means these sellers no longer need to make that difficult choice, and can instead feel more free to list their home on a more flexible schedule without fear of a potentially hefty tax hit.”

An increase to the residency requirement to five of the past eight years was proposed in the Senate bill, but it did not pass to the final version.

Kirchner stated, “Today, homeownership is imperative for middle-class wealth-building and financial stability. It allows people to invest in a long-term asset that pads their retirement savings, provides a safety net for unforeseen circumstances, and equity to back investment in education or small business. The survival of the capital gains exclusion means that the advantages of this type of investment will remain (except, of course, with regard to impact of changes to deductions).”

  1. Deducting on Home Equity Loans

According to the new law, taxpayers will no longer be able to deduct the interest paid on their home equity loans beginning in 2018, unless the funds are being used to improve their residence significantly. This provision expires in 2026 when it reverts back to the previous cap of $100,000 of home equity debt.

“Deductible interest on home equity loans used to provide homeowners another layer of financial security by giving them the ability to obtain low-cost financing,” Kirchner says. “Now, without the ability to deduct interest, owners effectively will have to pay more for their loans, which could put downward pressure on the homeownership rate.”

Casey believes removing this homeownership incentive will not dramatically impact the homeownership rate. But it will affect home renovations instead. About this, he says, “A lot of personal and economic factors matter more. This deduction is more important for financing major home renovations, so eliminating this deduction could contribute to underinvestment in the housing stock, making it more difficult for struggling communities to reinvent themselves.”

  1. Doubling of the Standard Deduction

Also in the previous law, $6,350 was the standard deduction for single taxpayers and married couples filing jointly. In the new law, this amount is nearly doubled to $12,000. The previous standard deduction for married couples filing jointly was $12,700. This has been increased to $24,000.

“A doubled standard deduction will have a big impact on how many homeowners ultimately decide to take advantage of the mortgage interest deduction,” says Casey. “When you combine a much larger standard deduction, with the fact that some itemized deductions have been capped or pared back, many filers may no longer find it financially advantageous to itemize deductions.”

According to Zillow’s calculations, Casey says that under the current tax code, itemizing and claiming the mortgage interest deduction is financially worthwhile on an estimated 44 percent of all U.S. homes. In addition, under the new law, itemizing and claiming the MID is worthwhile on only 14.4 percent of homes nationwide.

“The doubling of the standard deduction changes the equation for homeownership incentives and essentially renders the mortgage interest rate deduction ineffective for the majority of owners,” says Kirchner. “Until now, most households did not itemize their deductions until they bought a home, which added significant tax benefits to ownership. Based on the changes to the standard deduction, this benefit will disappear for all but those homeowners who have mortgages in excess of $550,000, depending on what other deductions they have.”

Location and Timing and the New Tax Law

How much you are impacted by the new tax law will be based largely on where you are located. If you are located in a high-cost state, you may see the biggest changes in how you file, especially with the new $10,000 SALT limit. According to Zillow Research, 51 percent of Americans surveyed last year said they agree with the statement that “the property tax rate in my community is unfair to me.” These sentiments may rise in response to residents of high-tax burdened markets receiving a higher tax bill because of the new limit.

For example, Zillow analysis conducted for the Wall Street Journal states that a top income earner in New York, who owns in the top-third price range of the metro, pays an estimated $23,000 in property and state income tax every year, which is double the amount now allowed for deductions. The analysis also reported $10,000 in similar circumstances for Raleigh, N.C., and $12,000 for a Chicagoan. These are just a few areas where high-earning taxpayers would be adversely impacted by the new SALT deduction cap. According to a Wall Street Journal article, Moody’s Analytics estimates that 80 percent of counties across the country will see a negative impact on home prices in the summer of 2019.

Low-tax states, however, may benefit from the new tax code. According to the WSJ, parts of North Carolina, Alabama, Nebraska, Indiana, and Tennessee may see boosts in their home prices and local economies. And the same Zillow analysis that surveyed high property and income taxes in other states says an individual in a similar financial situation would pay one-quarter of the amount in Nashville, Tennessee. For those that have been on the fence about moving, the tax overhaul may be their deciding factor. But those who live in high-tax states may not see the negative impact from taxes as reason enough to leave their homes.

According to NAR research, here are the five metro areas that will be most affected by the new tax law (based on homes with mortgages valued over $750,000):

  1. San Jose-Sunnyvale-Santa Clara, Calif.
  2. San Francisco-Oakland-Hayward, Calif.
  3. Santa Cruz-Watsonville, Calif.
  4. Santa Maria-Santa Barbara, Calif.
  5. Urban Honolulu, Hawaii

The top five metros based on share of owners that pay over $10,000 in real estate taxes:

  1. New York-Newark-Jersey City, N.Y., N.J., Pa.
  2. Bridgeport-Stamford-Norwalk, Conn.
  3. Trenton, N.J. Metro Area
  4. San Jose-Sunnyvale-Santa Clara, Calif.
  5. San Francisco-Oakland-Hayward, Calif.

In response to the bill’s passing, NAR President Elizabeth Mendenhall said, “Only 6 percent of homeowners have mortgages exceeding $750,000, and only 5 percent pay more than $10,000 in property taxes, but most homeowners won’t itemize under the new regime. While we’re pleased that important homeownership incentives such as the capital gains exclusion survived in conference, additional changes are required to truly incentivize homeownership in the tax code.”

But timing also plays a role. Many of the provisions in the Tax Cuts and Jobs Act, including individual tax cuts, expire in 2025 and therefore, may lead to tax hikes in the future, according to the Distributional Analysis of the Conference Agreement for the TCJA by the Tax Policy Center. The report states that taxes would be reduced by $1,600 on average in 2018, increasing after-tax incomes by 2.2 percent; however, in 2025, the average tax cut as a share of after-tax income would decrease by 1.7 percent for most income groups.

“The tax bill decreases homeownership incentives, but these benefits are not the only factors in the homeownership decision,” Kirchner says. “In the short run, homebuyers can look forward to more money in their pocket that can be used for a down payment or larger home.”

He adds that cuts in government services and economic development programs, along with the rescinding of tax cuts for individuals in a few years and the impact of tax reform-induced deficit on inflation, will weaken the impact of the after-tax income boost on homeownership.

“The change definitely removes some of the federal government’s preferential treatment towards homeownership,” Casey says. “Ultimately, with these new reforms, households will be more likely to maximize their tax breaks with a standard deduction. And when someone uses the standard deduction, it doesn’t matter if they spent an extra $5,000 on a house, a boat or a vacation—the spending is treated the same when tax season comes.

“It will be interesting to see how the temporary nature of some of these tax cuts shake out,” says Casey. “Will those households on the edge of homeownership make decisions based on what their new take-home income is in February, or will there be some apprehension if they think their taxes will rise down the road?”

According to an NAR statement, “As a result of the changes made throughout the legislative process, NAR is now projecting slower growth in home prices of 1-3 percent in 2018 as low inventories continue to spur price gains; however, some local markets, particularly in high-cost, higher-tax areas, will likely see price declines as a result of the legislation’s new restrictions on mortgage interest and state and local taxes.”

If you have any questions about how the new tax law will affect you, call Charles D’Alessandro at (718) 253-9600 ext. 206 today.

This article was largely taken from RISmedia.com’s article “Tax Reform: Here’s What Could Impact Homeowners Most.”

Charles D’Alessandro

Your Brooklyn Real Estate Agent with Fillmore Real Estate

718-253-9600 ext. 206

[email protected]

4 Misconceptions About Capital Gains And Your Brooklyn Home Sale

Wednesday, March 30th, 2016
Capital gains

It’s tax time. Don’t let the dreaded capital gains tax cause you dread. Learn more about it right here!

Your taxes are due. April 15th is just two weeks away. Are you ready? If you sold your Brooklyn home last year, there are a few things you should know about capital gains and your home sale.

High-fives to you! You made a positive financial move in 2015 and walked away with a profit on your Brooklyn home sale. Now it’s tax time and the dreaded capital gains tax threatens to burst your bubble of excitement. Maybe this will help.

What are capital gains?

According to nystax.net, capital gains are the profits that occur as a result of the difference between selling and purchasing price, on which sellers of a primary residence are taxed.

First, know this. The rules aren’t as rigid as they used to be, and there are plenty of exceptions and loopholes you should be aware of. Second, talk with your accountant in Brooklyn, and ask these important tax questions to help avoid any confusion on April 15.  See 10 Money-Saving Tax Questions Sellers Need to Ask.

Knowledge is power. Learning about capital gains on a positive home sale in Brooklyn will save you money. On that note, let’s break down 4 misconceptions you may have about capital gains and your Brooklyn home sale.

  1. All Brooklyn home sales are not treated equally

Flipper and homeowner sales are taxed differently. A homeowner who has uses their home as their primary residence for two out of the five years before it is sold will receive better tax treatment on their home sale profit. A flipper doesn’t usually use a home as a primary residence for two out of the five years before it is sold, so profit on the sale is taxed as capital gains. If you happen to flip houses regularly, your home purchases are inventory, not capital assets. The profit from these home sales are taxed as income. For most people, long-term capital gains tax is 15%, but if you happen to be in the top tax brackets, it is 20%. But, if the profits earned are considered taxable income, tax rates could range between 10% and 39.6% depending on the rest of your income. Homeowners can avoid the tax by rolling profits over into the next home they purchase. Those who flip houses can’t.

  1. What matters if you’re married or single

Thankfully, the once-in-a-lifetime tax exemption of $125,000, was done away with by the Taxpayer Relief Act, but limits still exist for claiming tax exemptions. If you’re married, you can claim a tax-free exemption up to $500,000 from the sale of each home. If you’re single, you can claim a tax-free exemption up to $250,000 from the sale of each home. Claiming this tax-free exemption can get a bit sticky for newly married couples though. Let’s say one person owned a house for two years before it sold, and his or her partner was added to the title for two months prior to the sale. That works. But, both the bride and groom must have lived in that home for two years before it was sold even if the one partner was only on the title for two months before they married. And, if either party sold a home within the last two years and claimed an exemption, the newlyweds will have to wait until that two-year window closes before claiming any profits from the home they now share.

  1. Is your home a primary residence, vacation home or a rental property?

What if you aren’t flipping homes? What if you have a second home or a rental property you’ve lived in for two years that you’d like to sell? For tax purposes, it won’t be treated as a primary residence. Before the 2008 shift in the tax code, second homes and rental properties received the same tax benefits even if the home became the primary residence for a time. Now a prorated amount is determined on the number of years the home or rental property was used as a second home or rented out after 2008.

Here’s a “story problem” to help me explain this scenario: If you used your vacation home for 15 years before 2010 when you began using it as your primary residence, 10% of the profit earned on the sale would be taxed. Here’s why: The 2 years following 2008 when your home was used as a vacation home equals 10% of the total 20 years you owned the home. As long as the rest of the profit from the sale of the home falls within the tax exemption limits, it won’t be taxed.

  1. The more my Brooklyn home sells for, the greater the capital gains tax will be

This isn’t true. For tax purposes, the capital gains tax you owe doesn’t depend on the price you sell your home for. It depends on the amount you profit from the sale. As long as you don’t profit more than the exemption amount allowed on the sale, your home could sell for $1 million and you would not owe any in taxes.

Selling your Brooklyn home can be complicated. There is a lot to know when it comes to taxes and capital gains in New York. For instance, you could be reaching your cap on tax exemptions but still qualify for a partial exemption and not know it. Be sure you talk with your tax accountant before you make a major financial real estate move. Ask important questions and avoid confusion. It’s your accountant’s job to know the details about capital gains taxes on the sale of your home and the tax exemptions available to you. Let them help you get the most from the sale of your Brooklyn home.

If you’re selling your Brooklyn home, contact Charles D’Alessandro, your Brooklyn real estate agent with Fillmore Real Estate at (718) 253-9600 ext. 206 or email [email protected] today. He can help you sell your home and get your questions about capital gains answered.