The recent tax reform called the Tax Cuts and Jobs Act (TCJA) brings about changes in the real estate tax deduction. This matters to homeowners, real estate investors, and real estate agents, among others. After all, it can leave questions such as how will the new tax law affect eligibility and tax benefits? To clear certain provisions, read the following.
In this article:
- An Overview of Property Taxes
- The Effects of the New Tax Bill on Real Estate Tax Deduction
- Changes in the Alternative Minimum Tax
Real Estate Tax Deduction | How It Works with the New Tax Changes
An Overview of Property Taxes
If you’re a new homeowner, investor, or agent, before you try to learn about the real estate tax deduction, you need to be familiar about the real estate tax.
Another term people use for “real estate taxes” is “property taxes.” These are the taxes levied by the local taxing authority using their respective local tax codes.
The term “property taxes,” however, may refer to two types of assets: movable and immovable.
The immovable assets are subject to property tax or real estate tax. These refer to land and house, both of which are attached to the ground. The personal property taxes apply to movable assets. These include RVs, mobile homes, and vehicles.
Either way, you may claim a portion of what you paid as a real estate tax deduction when you file your tax return for that year.
On the other hand, there are items you cannot claim as a real estate tax deduction. These include the following:
- Property taxes on properties you don’t own
- Transfer taxes after a house sale
- Assessments from your homeowners’ association
- Real property taxes included in the mortgage if the lender has not paid the property tax yet
- Taxes paid on rentals
- Payments paid on certain services such as trash collection
If the seller has delinquent taxes, and you decide to pay them upon the sale of the house, you also cannot claim it as a real estate tax deduction. It is assumed these unpaid taxes were part of the cost of the house.
Note a real estate tax deduction is different from a mortgage interest tax deduction, which also has some changes.
The Effects of the New Tax Bill on Real Estate Tax Deduction
The real estate tax deduction is helpful when homeowners want to get tax breaks on the amount of income tax owed at the end of the year. There are two ways to claim: standard and itemized deductions.
This allows homeowners to maximize their deductible. If their standard deductions are lower than when they itemize, then they can do the latter.
Before the new tax law, the standard deductions are:
- Single or Married Couple Filing Separately: $6,500
- Head of Household: $9,550
- Married Filing Jointly or Qualified Widow(er) with a Dependent Child: $13,000
The changes implemented in 2018 increased the amounts you could consider as a real estate tax deduction:
- Single or Married Couple Filing Separately: $12,000
- Head of Household: $18,000
- Married Filing Jointly or Qualified Widow(er) with a Dependent Child: $24,000
For the homeowners who like to itemize, the federal tax law capped the amounts at $10,000 for single filers and $5,000 for married couples filing separately. This reduction in what could be claimed for deduction has the biggest impact on people living in places with high local and state taxes.
Overall, based on these figures, it’s more likely those who tend to itemize their property tax deductions may opt to standard deductions from here on out. This, however, may be disadvantageous to those who are planning to buy more expensive properties. It’s also important to note the Tax Cuts and Jobs Act (TCJA) have also suspended exemptions until 2025. For those who qualified for high federal exemptions before may not truly benefit from a much higher standard deduction.
Changes in the Alternative Minimum Tax
The alternative minimum tax (AMT) was put in place to keep wealthy homeowners from avoiding paying their fair share of taxes by using existing tax deductions and exemptions to their advantage. If they become strategic, it’s possible they end up paying way less than they should have considering their income.
Over the years, problems arose including hurting the middle-income earners since this type of tax doesn’t take into account the inflation.
Furthermore, AMT can be confusing and overwhelming for people who have a high income or even those who live in states with high local taxes. This is because it works similarly as the standard income tax system but with a “twist.” It doesn’t have the same tax breaks including real estate tax deduction, but the standard deductions tend to be significantly higher.
There are also different tax rates imposed on the income after determining the AMT exemption. There are only two: 26% and 28%.
Under the new tax laws, the rates remained the same, but the exemptions increased. For example, in 2017, you paid the 28% AMT if your AMT income exceeded $93,900 for single, head of households, and married couples filing separately. It was $187,000 for couples filing jointly.
In the 2018 tax reform, the AMT rate is still 28%, but it kicks in only when the income exceeds $95,750 for single, head of households, and married couples filing separately and $191,500 for married couples filing jointly.
The many changes from the tax reform law can be confusing even for the consistent tax filers. If you struggle with determining your real estate tax deduction, get the advice of a tax attorney. It will save you from the hassle and the headache.
What do you think of the new changes in the real estate tax deduction? Tell us your thoughts in the comments section below.
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