GOP, President Trump Score Major Victory With Tax Reform Passage

John Jordan | December 2017

WASHINGTON—As expected, in a procedural vote the House of Representatives approved the Tax Cut and Jobs Act on Wednesday. The controversial measure passed 224-201, with no support from Democratic Congressional representatives. A total of 12 House GOP members voted against the bill. The Senate passed the bill earlier in the morning by a 51-48 margin.

While the National Association of Realtors and other real estate and business groups lobbied heavily against some of the key provisions of the proposal, changes made in the bill reconciliation process by the conference committee did result in some beneficial changes for the real estate industry.

President Donald Trump told reporters prior to the final House vote, “This bill means more take-home pay and will be an incredible Christmas gift for hard-working Americans.”

House Speaker Paul Ryan said after the passage of the Tax Cuts and Jobs Act, “Today, Congress approved a once-in-a-generation tax reform bill. This is the end of a long journey to deliver major tax relief to the American people. Now, this historic legislation will be sent to the president’s desk so we can start 2018 with a new tax code.”

Democrats assailed the tax reform bill. House Democratic Caucus Chairman Joe Crowley (D-NY) said the tax bill will significantly harm the American middle class:

“With this vote, Republicans have abandoned all pretense that they are fighting for the middle class. The GOP tax plan is a sham that will add trillions to our deficit and will leave behind the very people the GOP claims to help—average Americans.

NAR representatives were at least pleased that some onerous components of the original tax reform plan were removed or amended.

“We remain concerned that the overall structure of this bill poses problems for homeowners and the broader housing market, but the conference committee has made some important improvements to the House and Senate legislation that ultimately will benefit some homeowners and communities,” said NAR President Elizabeth Mendenhall. “We are particularly pleased with the treatment of capital gains on the sale of a home and the preservation of deductions for second homes. We are also grateful that the positive changes for commercial real estate and real estate professionals from the Senate bill have survived.”

The following are the key provisions of the tax reform legislation, according to the National Association of Realtors.

Effects on the Tax Benefits of Homeownership

Standard Deduction

The final bill follows the Senate bill and provides a standard deduction of $12,000 for single individuals and $24,000 for joint returns.
Mortgage Credit Certificates

The House bill repealed MCCs, but the final bill leaves them in the law.

Mortgage Interest Deduction

Reduces limit on deductible mortgage debt to $750,000 for new loans taken out after 12/14/17.

Current loans up to $1 million are grandfathered.

Homeowners may refinance mortgage debts existing on 12/14/17 up to $1 million and still deduct the interest, so long as the new loan does not exceed the amount refinanced.

Repeals deduction for interest paid on home equity debt through 12/31/25.

Interest is still deductible on home equity loans if proceeds are used to substantially improve the residence.

Interest remains deductible on second homes, but subject to the limits.

State and Local Taxes

Final bill allows an itemized deduction of up to $10,000 for the total of state and local property taxes and income or sales taxes.

The final bill also specifically precludes the deduction of prepaid 2018 state and local taxes (in 2017).

Deduction for Casualty Losses

Final bill provides a deduction only if a loss is attributable to a presidentially-declared disaster.

Deduction for Medical Expenses

Final bill follows the Senate bill and retains the deduction for medical expenses (including decreasing the 7.5% floor for 2018).

Other Effects on Current and Prospective Homeowners

Tax Rates

The tax rate schedule general follows the Senate bill, with seven rates ranging from 10% to 37%.

The final bill retains the current-law maximum rates on net capital gains (generally, 15% maximum rate but 20% for those in the highest tax bracket; 25% rate on “recapture” of depreciation from real property).

Personal Exemptions

The final bill repeals the deduction for personal exemptions.

Child Credit

The final bill increases the child tax credit to $2,000 from $1,000 and keeps the age limit at 16 and younger.

Student Loan Interest Deduction

The House bill repealed the deduction, but the final bill retains it.

Moving Expenses

Final bill repeals moving expense deduction and exclusion, except for members of the Armed Forces.

Exclusion of gain on sale of a principal residence

The final bill retains current law.

Effects on Business Income From Pass-Through Entities

The final bill follows the Senate bill’s approach of allowing a deduction for business income, but the amount is 20% (not 23%).

The threshold amount of taxable income where personal service businesses and the wage limit are phased in is set at $157,500 for single individuals and $315,000 for couples.

Above this level, the benefits are phased out over an income range of $50,000 for singles and $100,000 for couples.

Impact on Most NAR Members

For those agents and brokers who earn business income from personal services, and their total taxable income for the year is under the thresholds above, they will receive a deduction of 20% of their business income.
If their taxable income is over $157,500 (single) or $315,000 (joint) but less than $207,500 (single) and $415,000 (joint), the deduction will be phased out.

For those receiving above these amounts, business income earned from personal services will receive no deduction, but any business income received from non-personal services can receive the 20% deduction, but it will be limited by 50% of the amount of wages paid plus 2.5% of the amount of tangible property invested in the business.

Effects on Real Property

Cost Recovery (Depreciation)

Final bill does not include the lower recovery periods for nonresidential real property and residential rental property and leasehold improvements. Thus, the current-law recovery periods of 39 years, 27.5 years, and 15 years, respectively, remain.

Like-Kind Exchanges

The final bill excludes real property from the repeal of section 1031 like-kind exchanges.

Carried Interest

Final bill includes the House and Senate language requiring a 3-year holding period to qualify for current-law (capital gains) treatment.

Rehabilitation Credit

Final bill repeals the current-law 10% credit for pre-1936 buildings but retains the current 20% credit for certified historic structures but modified so the credit is allowable over a 5-year period based on a ratable share (20%) each year.

Other Provisions of Interest

Excise Tax on Excess Tax-Exempt Organization Executive Compensation

Follows Senate provision, with modifications.

 

John Jordan
Editor, Real Estate In-Depth