The Tax Man Cometh - A Q&A with Richard Staniszewski
by HEATHER JAMES
HJ: The tax reform passed into law at the end of 2017 has caused quite a stir and people seem to have all the feelings about it. Can you cut through the clutter and share how the tax bill will affect real estate?
RS*: Sure. The tax bill affects real estate – and taxpayers in general -- in a number of ways. But first, let me emphasize the new rules take effect for this tax year, 2018. So next year, in 2019, is when people will see the changes and they should begin planning now. The two biggest changes for taxpayers are that the tax rates (brackets) and standard deductions change fairly significantly. The tax burden is slightly lowered for most with tax rates going to 10%, 12%, 22%, 24%, 32%, 35% and 37% from the previous brackets of 10%, 15%, 25%, 28%, 33%, 35% and 39.6%.
The second big thing is that the standard deduction everyone can take is doubled from $6,000 to $12,000 for individual filers and from $12,000 to $24,000 for joint filers. This change is significant but it’s important to note that it basically removes the benefit people can realize from itemizing deductions. That, paired with a $10,000 limit to itemize state and local property and income/sales taxes (especially significant in more expensive states like New York and California) and the repeal of personal exemptions, may cause the increased standard deduction to be largely a wash for many people.
HJ: As legislators were debating the reforms, I remember a fairly large uproar about those state and local taxes. As I understand it, we avoided completely eliminating the ability to deduct property taxes. While a cap of $10,000 is less beneficial than the previous law, it’s certainly better than removing it altogether.
RS: Right. Other late in the debate changes included the capital gain on the sale of a principal residence and the mortgage interest deduction. In early drafts, the reforms were to increase the time a homeowner had to live in a home to qualify for the capital gains exclusion from 5 out of the past 8 years, which would have negatively impacted those of us in real estate generally. Instead, the final bill retains the previous stipulation that a homeowner could claim capital gains exclusion for residing in a home for 2 out of the past 5 years.
The final bill enacted into law reduces the limit on mortgage debt to $750,000 from $1 million. However, earlier drafts of the law would have capped the mortgage interest limit at $500,000 and completely eliminated the deduction for second homes. The average home price in the United States in January 2018 was approximately $380,000. However, in some of the more metropolitan areas of the country it is not uncommon for a home to sell for more than $500,000. Therefore, again, it is less beneficial than the original law but better for the real estate industry than the early dialog.
HJ: So that’s a positive and we should thank groups like NAR (National Association of Realtors) who lobbied hard for our industry. Obviously, if people don’t see the help of these tax benefits, they may think twice about entering into home ownership and that would negatively affect not only us personally, but our real estate industry broadly.
RS: It’s true that we should thank the groups that lobbied for our industry because the tax reforms could have been much worse. However, NAR, for example, has said they are still concerned that the “bill diminishes the tax benefits of homeownership and will cause adverse impacts in some markets...but the final legislation will benefit many homeowners, homebuyers, real estate investors, and NAR members.” I must say, on balance, I agree with them.
HJ: Anything else you want to add?
RS: Yes. Our industry is made up of lots of people in business for themselves...sole proprietors, independent contractors, LLCs, S-Corps, etc. If you are in business for yourself, your biggest take away should be: this is the year to meet with an experienced accountant and re-evaluate your business in light of the tax laws. The reform bill contains some nuances that don’t seem to be getting much visibility and I’m afraid are probably being overlooked. Depending on the type of service your business provides you may be subject to different tax rules than before and in some cases only a portion of your income can qualify for the new brackets. My advice is to meet with an accountant sooner rather than later so that you can take advantage of this new knowledge and have time to implement any changes needed before too much of the year slips by.
Beyond that, there are a few new tweaks with which real estate agents - all people, really - need to become familiar like:
- The meals and entertainment rules change - you can still deduct 50% of food and beverage, but tickets (sporting events, concerts, etc.) are no longer allowable;
The categories of depreciation – you can still depreciate the business use of a car (in fact you can now take almost four times the amount as before) but make sure you research whether it’s better to add the actual out of pocket costs and depreciation or take the standard mileage deduction, which goes up to $.54 per mile;
Continue to treat Schedule C like your profit and loss statement – include commission, expenses, business use of car, home office use, etc., but be sure to look closely for updates and changes.
Basically, people should protect their personal and business interests by researching issues completely and obtaining the facts or best-case meet with an experienced accountant who can navigate these complicated waters. Always make your estimated tax payments and double check your withholding to ensure it properly reflects your situation in light of the new tax law.
NAR has assembled a very thorough summary of the changes and has a video that’s well worth the 40-minute view. You need to pay attention to details like limits, timeframes (some items are grandfathered in, others are not) and descriptions.
HJ: I guess what Dad always said really is true: the only sure thing in this world is death ... and taxes! Thanks for taking the time to get us started and begin digesting the nuances of how the new tax bill will affect real estate and, really, all taxpayers.
Richard M. Staniszewski is Vice President of Strategic Operations at Cook & James. He works directly with the partners to advise on strategy, finances and scalability. Richard brings more than 20 years of experience to the firm after a distinguished career working with companies such as Bellsouth, AT&T, CBeyond and UBS. His has worked all over the world to implement sustainable business systems. He also honorably served in the United States Navy.
*Comments in this Q&A are in no way, shape or form intended as tax or financial planning advice. Consult an accountant or tax attorney for your own tax planning needs.