The recently passed federal tax bill will definitely have an impact on real estate. In general markets with high taxes and high values will be most affected. Despite the recent increase in local property taxes, Boulder County is considered a low property tax area compared to other parts of the country. However, we are a high value market. Here is a summary of the main points of the tax bill that affect real estate.
Mortgage Interest Cap – This is in regards to how much of the interest paid for mortgages can be used as a deduction. For those whose mortgages balances are less than $750,000 this will not affect anything. Previously the cap was $1 million and it has now been reduced to $750,000. Not many people have loans in excess of $750,000, but in our area where the luxury home market is very robust, we may see fewer buyers able to make those purchases. The interest on the first $750,000 is still deductible. This may dissuade some luxury home purchasers to buy a less expensive home, thereby reducing the demand for the very high end.
Local and State Tax Deduction – The Boulder County Treasurer was inundated before the new year with property owners pre-paying their property tax bill in advance. This was in response to the section of the tax bill which caps the deduction for state and local taxes at $10,000. Previously, homeowners were able to deduct from their federal tax return the amounts paid for state income tax, various ownership taxes and property taxes without limit. Now the deduction is limited to $10,000. Buyers may shy away from a house with a large tax bill knowing that payment will no longer reduce their tax bill.
Other Related Items – Those who own investment real estate may be getting a tax break on their real estate investment income. Income that comes through pass-through entities such as LLC’s get a tax break. 20% of that income can be deducted. You may have heard that the capital gains exclusion time limit had been expanded to require living in a house 5 of the previous 8 years in order to use the $250,000 for a single or $500,000 for a couple when selling a principal residence, this was overturned during the last few days leaving the existing rule of occupying the home two of the past five years.
This is just a high level outline, please contact your tax professional for more details.