How is Real Estate Affected by the New Tax Law?

  

There are some pretty big changes coming with the upcoming tax law that recently passed. We asked Dan Parr, of Parr Accounting how those laws will affect real estate, and here's what he had to say.

The 2017 Tax Cuts and Jobs Act was passed into law in late December and will be in place for 
2018 and later income tax returns. How does this law affect the real estate market and taxpayers 
who own homes?

One major change is that mortgage interest will only be deductible on the first $750,000 borrowed to 
purchase or construct a home. The former limit was $1M. This means that the tax benefit for a large 
mortgage will not be as impactful when filing tax returns in the future.

Also -interest paid on HELOC loans will generally not be deductible under the new law. The old law 
allowed a taxpayer to deduct the interest on the first $100K of a HELOC loan, no matter how the funds
 were used.

State and real estate taxes - most homeowners itemize their deduction each year. Beginning in 2018, 
the total of state income taxes paid and real estate taxes paid on the primary residence will be capped 
at $10,000. This amount was previously unlimited, but did lead to Alternative Minimum Tax for many 
higher income taxpayers.

Lastly, the standard deduction allowed by the IRS will almost double-up to $12,000 for individuals and 
$24,000 for married taxpayers. Combined with the tax limit mentioned above, MANY more taxpayers 
will be claiming the standard deduction in 2018 and later years.
 

"Just how does this affect taxpayers who own homes?"

Homeowners used to be able to calculate the “after tax' cost of a mortgage payment and 
compare this to the rent paid on a similar home. In a 25% federal tax bracket and 9% Oregon tax 
bracket, a $2500 mortgage payment (including principal, interest, tax and insurance), was equivalent 
to paying rent of roughly $1700. This calculation will not longer be valid due to the tax limit and larger 
standard deduction. This does not mean that home ownership will not longer be a tremendous 
long-term investment. It will become more difficult to calculate the current benefits.

Taxpayers who have rental property or other investment property may want to “trace' the interest paid 
on their primary residence to the purchase of these other investments in order to get better tax benefit 
in future years.

Note that even though many taxpayers will not itemize for federal tax purposes due to the increased 
standard deduction, they will still have to save all the similar items used in prior years because the 
Oregon standard deduction will remain at roughly $4,000 for married taxpayers.

The IRS did not change the primary residence exclusion rules - married taxpayers can still exclude up 
to $500,000 of gain ($250,000 for single taxpayers) on the sale of their primary residence if they have 
lived in the home as their primary residence two of the previous five years. Congress was considering 
changing this to five of the previous eight years.

Section 1031 as it relates to real estate transactions was not changed in the new law. Taxpayers can 
defer the gain on the sale of investment real estate as long as they spend the net proceeds (sales
price less closing costs) on the purchase of replacement real estate within 180 days.

If you have any questions about how these changes affect you, reach out to
Dan@ParrAccounting.com. You can also visit his website, here.

I you have any questions about the current real estate market and how prices will move in the coming 
months, give me a call. I'm here to help!

 

Join Us for the Grand Opening of Our New Office

We are so excited to move to our new permanent location, 1860 NE 4th Street, Bend, OR, 97701.We are saying goodbye to HomeSmart on December 31 and rolling out our exciting new company, Red Door Realty, in 2018. 

Join us at our new office on January 19 for our Grand Opening Party. There will be refreshments and an iPad giveaway. To get a sneak preview of our new office, watch this short video. 

If you have any questions about this change or other real estate-related topics, feel free to give us a call or send an email. We'd love to help you reach your real estate goals.

How A Home Warranty Will Benefit You

If you’re buying a home, I highly recommend you get a home warranty. There are many benefits in doing so.

If you’re buying a home, should you get a home warranty? Oftentimes during a home sale, it’s natural for buyers to ask themselves this question and wonder whether they really need it. There are a few things you should know about what home warranties can do for you.  

When buying a new construction home, it automatically comes with a 12-month warranty for all the major systems and components. When buying a home that’s not new construction, the day you close, you’ll be responsible for any issues that come up. Typically, these issues come up pretty quickly during that first year of ownership.

A home warranty covers all the major systems in the home, and Home Warranty of America even offers roof leak repair, which can come in handy for us central Oregon residents who just endured a winter that featured a lot of snow and ice dams.

The cost of a home warranty ranges from $370 to $500, and that sum can be included in your overall closing costs. The $500 plan covers everything and gives you additional coverage if items need to be replaced, whereas the $370 plan only covers the major systems.

When I’m working with a buyer, I always include the home warranty when I write up the offer and ask the seller to pay for it as part of the transaction. Roughly 75% of the time, sellers don’t mind doing this, and they’re happy to build confidence in the home they’re selling. If you work with our team, we always include this in the offer. If you’re working with another Realtor, ask them to ask the seller to pay for it.

When I’m working with a buyer, I always include the home warranty when I write up the offer.

If the seller doesn’t agree to pay for it, I highly recommend you at least get the minimum plan or find out about getting more coverage. I have a home warranty on my home that I renew every year. When living within a budget, you never know what can happen or what systems might fail that could cost you thousands of dollars.

One of the more common items new homeowners have issues with is water heaters. Sometimes buyers who buy their homes in the summer and turn on their furnace for the first time in fall find out that it’s not working. This happens because when the inspector turned on the furnace during the home inspection, they only did so for five or 10 minutes, which isn’t long enough to pick up on any potential problems. The same potential problem applies to AC units for buyers who buy during the winter.

The systems in the home that don’t get used are the ones that might get rusty or break down faster, and there are differences in usage patterns from one homeowner to another. If you have large family moving into a home where a smaller family lived, you’ll get more wear and tear in a home, and that’s why you see breakdowns happen almost immediately after the family moves in.

All of this is why we encourage all of our buyers to get a home warranty when purchasing a home. Hopefully the seller will pay for it, but if they don’t, you can get it incorporated into your closing costs through your loan.

If you have any questions, I’ve included a brochure in this blog which talks about the main things a home warranty covers. As always, if you have any other questions or you need to buy or sell a home in our central Oregon market, don’t hesitate to reach out to me anytime. I’d be happy to help you.