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How Will The Tax Cuts And Jobs Act Impact Real Estate Transactions?
Whether you're planning to sell your home or buy a new one—or both—this year, you may be wondering exactly how the Tax Cuts and Jobs Act of 2017 have changed the way real estate transactions are reported and taxed. Fortunately for both buyers and sellers, the TCJA has streamlined several aspects of the real estate purchase process, and many homeowners may find themselves pocketing a much higher profit than they may have seen in 2017 or earlier. Read on to learn more about how 2017's sweeping tax reforms could positively affect your next real estate transaction.
Changes in Depreciation Rules
If you're purchasing a home with plans to turn it into a rental at some point, there's good news: beginning in September 2017, you'll be able to claim 100 percent bonus depreciation in the year this qualifying property is placed into service. This can significantly reduce your taxable income for that year and thereafter.
Unfortunately, this provision isn't a permanent part of the TCJA, and you'll need to take advantage of it before 2023 when the rate begins to drop by 20 percent per year. By 2027, the bonus depreciation schedule will be eliminated entirely.
Another bit of positive news for real estate investors is the doubling of the annual limitation for Section 179 expenses. Instead of being capped at $500,000 in annual expenses, you'll be able to claim up to $1 million, and the definition of qualifying expenses under Section 179 has been expanded to include fire protection systems, burglar alarms, heating, ventilation, air conditioning (HVAC) systems, and even roofs.
Preservation of 1031 Exchange Rules
Section 1031 permits tax-free "like-kind" exchanges for non-residential real estate. This allows you to exchange one investment property for another without paying capital gains taxes on any profit.
Although you can't use a 1031 exchange to shield profit from selling your primary residence, by placing this residence into rental service for a period of time before you list it for sale, you may be able to make it 1031-eligible. This can be a major advantage for those living in cities like Seattle and San Francisco, where the cost of housing has skyrocketed and provided homeowners with more equity than they may have ever dreamed possible. Renting out your home for a year or two, then selling it and putting the profits into a commercial venture can help you shield hundreds of thousands of dollars from federal and state taxes.
For more information, contact a company like DSJCPA.