Updates Affecting Home Owners & Self-Employed Business Owners

Updates Affecting Home Owners & Self-Employed Business Owners

  • In the past, home ownership carried significant tax savings opportunities with it. Under the new law, the tax advantages associated with home ownership are greatly minimized, offering little or no benefit over renting a home. Under the new law, experts are estimating that only 5% of taxpayers will be eligible to itemize their deductions.
  • For mortgages initiated after December 15, 2017, mortgage interest is limited to underlying indebtedness of $750,000 (decreased from $1,000,000).
    • Mortgage interest is still allowable for second residences so long as the underlying indebtedness does not exceed the $750,000 threshold.
    • Deductions for interest on home equity indebtedness has been suspended for tax years after 2017.
  • In order to compete with the reduction in tax rate for corporations, Congress included a deduction of 20% of business income earned from pass-through businesses (such as sole proprietorship’s, partnerships, and S Corporations) for certain taxpayers.
    • Personal service businesses are specifically excluded from the definition of qualified business income for purposes of this deduction.
      • Personal service businesses include those involved in the fields of health, law, accounting, consulting, financial services, or where the principal asset of such trade or business is the reputation or skill of one or more of its employees.
    • It seems clear that most real estate agents and brokers will be considered in a personal service business.
    • However, there is an exception: For single taxpayers with taxable income less than $157,500 or $315,000 for couples filing jointly, the personal service restriction does not apply.
    • There are multiple phase ins, phase outs, and limitations to 20% deduction, and each taxpayer’s individual situation will need to be reviewed and analyzed for their specific ability to claim the deduction. Two examples are included below.
  • Beginning in 2018, the Rehabilitation Credit (known as the Historic Tax Credit) has been modified.
    • For qualifying rehabilitation expenditures relating to a Pre-’36 building, the 10% credit has been repealed.
    • A 20% credit for qualified expenditures on certified historic structures is now available to be claimed ratably over a 5-year period beginning when the structure is placed in service.
  • The rules relating to gain on the sale of a principal residence being excludable from income remain unchanged. Like-kind exchanges for real property remain unchanged under the new law, as does the low-income housing tax credit.

***Disclaimer: I am a tax accountant and a CPA licensed in Massachusetts , but I am not your accountant or advocate (Unless you have signed up to my services). This communication is not intended as tax advice, and no tax accountant -client relationship results**

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