We at CSS want to wish you Happy Holidays to you and a safe, healthy and prosperous 2018!
I think the item that is first and foremost on everyone’s minds as 2017 comes to a close is the new tax reform legislation that recently passed the House and Senate. Congress passed the Republican tax reform bill, HR.1, the "Tax Cuts and Jobs Act" on Wednesday, December 20, 2017. The legislation, on its way to President Trump to be signed and enacted, will take effect January 1, 2018. The plan, which is expected to lower income tax bills next year for many households, is the most significant overhaul to the tax code since 1986.
How will the tax reform legislation impact 1031 exchanges?
Some of the effects on Section 1031 exchanges include:
- Section 1031 like-kind exchanges for real estate are preserved.
- The role of the Qualified Intermediary is preserved.
- Exchanges of personal property assets, including heavy equipment, farm machinery, livestock, vehicles, aircraft, artwork and collectibles, franchises, and intangibles are eliminated. Only real estate exchanges will qualify for tax-deferral treatment after January 1, 2018.
- Several other provisions, including cuts to the corporate and individual tax rates, 100% immediate expensing for business assets, and provisions for pass-through businesses will affect Qualified Intermediaries, exchange clients, investors, businesses, and multiple industries.
The legislation permits a taxpayer to complete a personal property exchange as long as the taxpayer 1) begins the exchange in 2017, AND 2) EITHER i) sells the relinquished property by December 31, 2017, OR ii) acquires the replacement property by December 31, 2017. Note there is no reference to acquisition of replacement property by an EAT; the legislation specifies that the taxpayer must acquire the replacement property in order to fit within the transition rule.
Only real estate exchanges will qualify for tax-deferral treatment after January 1, 2018.
How will the tax reform bill impact homeowners?
While the full impact of the tax reform legislation may not yet be known, the following is a summary of some of the changes we will see:
- Individual Rates. The individual rates fall across the board. The new law not only lowers rates across all seven tax brackets, but lowers the threshold for each bracket. This also applies to taxpayers who file jointly. The majority of the individual cuts expire on December 31, 2025. Republicans have said they intend and expect to extend these tax breaks when the time comes.
- Standard deduction: The new law increases the standard deduction to $12,000 for single filers and $24,000 for joint filers. Many homeowners will no longer be itemizing deductions.
- Mortgage interest deductions: The limit on deductible mortgage debt is capped at $750,000 for loans taken out after Dec. 14. (Loans made before that date can continue to deduct interest on mortgage debt up to $1 million.) Homeowners can refinance mortgage debts that existed before Dec. 14 up to $1 million and still deduct the interest as long as the new loan does not exceed the amount refinanced. The interest on a home-equity loan can be deducted as long as the proceeds are used to substantially improve the home. Mortgage interest on second homes can be deducted but is subject to the $750,000 limit.
- Principal Residence exclusion: Home sellers can exclude up to $500,000 for joint filers or $250,000 for single filers for capital gains when selling a primary home as long as the homeowner has lived in the residence for two of the past five years. An earlier proposal would have increased that requirement to five out of the last eight years but it was struck down.
- State and local property taxes: Property tax deductions are limited to $10,000. Also, you cannot prepay 2018 state and local taxes in 2017.
- Moving expenses: The law eliminates the deduction for moving expenses, except for members of the military.
- Estate tax: The law doubles the estate tax exemption to $11.2 million.
Housing Predictions for 2018.
According to realtor.com, there are six major predictions for the housing market for 2018:
1. Home price appreciation – Home prices are expected to rise 3.2% next year. This slower rate of increase will allow for home sales to pick up next year.
2. Mortgage rates – Mortgage rates are expected to average 4.6% throughout the year, but reach 5% for the 30-year fixed-rate mortgage by the end of the year. The Mortgage Bankers Association also predicted that rates will continue rising and mortgage rates could pass 4% or even 5% over the next few years.
3. Existing Home Sales – Existing home sales are forecasted to rise 2.5% as the trend in low inventory begins to reverse course.
4. Housing Starts – New home sales will increase, meaning housing starts will also rise. Overall, housing starts are predicted to rise 3% over the year, but single-family home starts will increase 7%.
5. New Home Sales – These will increase at the same rate as housing starts, rising 7% year-over-year in 2018.
6. Homeownership Rate – The homeownership rate will stabilize at 63.9% after having hit bottom in the second quarter of 2016.
The National Association of Realtors (NAR) predicted 2017 will end with 5.47 million existing home sales, the fastest pace since 2006. For 2018, NAR forecasts that:
- Home sales will increase 3.7% to 5.67 million in 2018, the highest point since 2006.
- The national median home price will increase 5.5% in 2018.
- The greatest impediment to home sales in 2018 is the ongoing shortage of housing supply. New home construction has been falling behind in recent years, and current homeowners are staying in place for a longer period before selling their home, keeping inventory low from both sides.
- NAR also predicted if the tax reform billed passed, it could act as a disincentive to homeownership and hold back strong sales activity, according to its residential housing and economic forecast.
Legal News and Case Law:
Denial of PRE: In Rentschler v Township of Melrose, a Michigan Court of Appeals case, the decision of the Tax Tribunal was overturned when the Court ruled that the rental of a principal residence for more than fourteen (14) days does not disqualify a homeowner from claiming the principal residence exemption (PRE) from property taxes. The Tribunal denied the PRE because the homeowner had rented out the residence for more than 14 days during each year. The Tribunal relied on the Michigan Department of Treasury Guidelines for the Michigan Principal Resident Exemption program (PRE guidelines). The pertinent PRE guideline states: “[I]f an owner rents his property for more than 14 days a year, the property is not entitled to a principal residence exemption.”
The Court of Appeals found that this PRE guideline is contrary to the General Property Tax Act and that the controlling statutes do not disqualify a property from primary residence status simply because the residence has been rented for 15 days or more and ruled in favor of the property owner.
Following this decision, homeowners, provided they meet the statutory requirements for the PRE, will no longer be denied the PRE exemption because they rent their homes for more than 14 days. In addition, they may be able to request a review of the current tax year, as well as the three (3) immediately preceding tax years.