Like the Tax Law? Don’t Like It? Remember, Much of It Expires in 2025
Whatever you think of the “Tax Cuts and Jobs Act,” which President Donald Trump signed into law just before Christmas, much of it goes away on Dec. 31, 2025, which means many of the changes will revert back to what was in place before the bill was signed unless Congress acts to extend the provisions.
REALTORS® can take some credit for many of the bill’s improvements during its development. The bill originally curtailed the capital gains exclusion that home sellers get today, but because of REALTORS®’ involvement, current law was kept in place. As a result, individuals can still sell their home and exclude up to $250,000 in proceeds from capital gains taxes. For married couples filing jointly, it’s $500,000.
On the commercial side, REALTORS® helped keep tax-deferred 1031 exchanges in place. House Republicans met with REALTORS® just after they released their original tax reform blueprint and heard that 1031 exchanges were crucial to commercial sales. NAR testified to that effect, too, before the Senate Finance Committee.
Other big changes REALTORS® helped secure include a compromise on the deductibility of state and local income taxes and property taxes. Households can still deduct both of these taxes, although they’re limited to a total of $10,000.
REALTORS® also helped fight back against limitations on the mortgage interest deduction. The law keeps in place MID, for both primary residences and second homes (although it eliminates it for equity lines of credit), but it limits the deduction to $750,000. That’s a reduction of $250,000 from the old limit of $1 million, but it’s higher than the $500,000 included in the House bill.
Despite these improvements, the new law, on balance, hurts homeownership. That’s because many households today that itemize their deductions will no longer find it financially advantageous to continue doing so. As a result, they’ll receive no benefit in the tax code for being homeowners.
Instead, under the new law, most homeowners will take the standard deduction, which is increased to $24,000 from a little above $12,000 today. Although the deduction is larger, the gain is partially offset by the loss of the personal and dependency exemptions. Today, these exemptions are $4,150 for each eligible person in the household. For a household with four eligible people (wife, husband, and two children, for example), that’s $16,600 in lost exemptions. When you subtract that from the newly increased standard deduction, you see that you’ve made no or little gain from what you had before. For some households, it might make sense to go back to itemizing except that now itemized deductions are limited.
On the plus side, the law could prove helpful to real estate professionals in the treatment of your business income. The law creates a 20 percent deduction for so-called pass-through entities. Pass-through entities include business people whose income is taxed on the individual rather than the corporate side of the tax code. So, as an independent contractor whose income is taxed as individual income, you could be eligible for the new deduction. You’ll want to check with your tax professional on that, because there are limitations on how that’s applied.
You can learn about what’s in the new law in a Facebook Live event NAR is hosting on Thursday, Jan. 4, at 1 p.m., Central time, 2 p.m., Eastern time. Because it’s live, you can ask questions of the speakers. These include Peter Baker, an accountant who specializes in working with real estate professionals, and Evan Liddiard, NAR’s tax policy specialist.
Bottom line: The law is better for real estate than it started out to be, thanks in large part to REALTORS®’ engagement politically. But it can still be made better, particularly for homeowners. On big, complex laws like this one, it’s not unusual for Congress to follow up with another bill to correct or tweak provisions as problems become apparent. There’s a good chance Congress will take up such a bill in 2018. If they do, REALTORS® will continue to make their voices heard. And then there’s Dec. 31, 2025. Unless Congress passes extensions, many of the provisions expire then.
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