‘Twas the night before Christmas, when all through the house…..
Not a creature was stirring not even a mouse;
The sign was stuck in the lawn with care,
In hopes that the buyers soon would be there;
The Realtors at open house had all been fed,
While visions of commissions danced in their heads;
But the first buyer who saw the house on a map,
Had between what he had and the list price a gap.
When out on the lawn there arose such a clatter,
It was buyer #2 – the Mad Hatter!
He had made a great offer with savvy and flash,
Tore open his briefcase and threw out the cash.
I thought the appraiser might value too low,
I’m just a Realtor – what do I know?
When, what to my wondering eyes should appear,
But an acceptable contract and a lender no fear.
With a termite inspector so thorough and quick,
I knew in a moment, I wouldn’t be sick.
More home inspections that all sound the same,
We whistled and shouted and called them by name;
“Now ROOFER! Now, GARDENER! Now, PAINTER a mixin,
New carpet, new vinyl new hardwood we’re fixin.
To the top of the stairs! To the top of the wall!
More estimates, more bids, now more contractors call!”
And then, in a twinkling, I heard such good news,
After fretting and worrying, this I could use.
As I lifted my cell phone and dialed, I found,
the loan docs are here, with nary a sound.
Her eyes how they twinkled! Her dimples how merry!
Escrow instructions with her she carried.
Closing costs didn’t seem too low,
But I reminded the buyer sometimes we don’t know.
The cashiers’ check held tight in his teeth,
My buyer was calm his nerves underneath.
He spoke not a word, but went straight to his home
I gave him the house keys no more to roam.
As we compose this real estate Christmas prose,
Alas this is not how each escrow does close.
Before you buy or sell, give us a whistle,
As Realtors we’ll keep you out of the thistles.
Please give us a chance, And feel free to call,
“MERRY CHRISTMAS TO YOU
AND HAPPY NEW YEAR TO ALL!”
FROM: DANETTE ONEAL REALTORS
(by Nancy Schubb, Security Pacific Real Estate
Walnut Creek, CA.)
Tax Rate Reductions
The new law provides generally lower tax rates for all individual tax filers. While this does not mean that every American will pay lower taxes under these changes, many will. The total size of the tax cut from the rate reductions equals more than $1.2 trillion over ten years.
The tax rate schedule retains seven brackets with slightly lower marginal rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
The final bill retains the current-law maximum rates on net capital gains (generally, 15% maximum rate but 20% for those in the highest tax bracket; 25% rate on “recapture” of depreciation from real property).
Exclusion of Gain on Sale of a Principal Residence -The final bill retains current law. A significant victory in the final bill that NAR achieved.
The Senate-passed bill would have changed the amount of time a homeowner must live in their home to qualify for the capital gains exclusion from 2 out of the past 5 years to 5 out of the past 8 years. The House bill would have made this same change as well as phased out the exclusion for taxpayers with incomes above $250,000 single/$500,000 married.
Mortgage Interest Deduction – The final bill reduces the limit on deductible mortgage debt to $750,000 for new loans taken out after 12/14/17. Current loans of up to $1 million are grandfathered and are not subject to the new $750,000 cap. Neither limit is indexed for inflation.
Homeowners may refinance mortgage debts existing on 12/14/17 up to $1 million and still deduct the interest, so long as the new loan does not exceed the amount of the mortgage being refinanced.
The final bill repeals the deduction for interest paid on home equity debt through 12/31/25. Interest is still deductible on home equity loans (or second mortgages) if the proceeds are used to substantially improve the residence.
Interest remains deductible on second homes, but subject to the $1 million / $750,000 limits. The House-passed bill would have capped the mortgage interest limit at $500,000 and eliminated the deduction for second homes.
Deduction for State and Local Taxes– The final bill allows an itemized deduction of up to $10,000 for the total of state and local property taxes and income or sales taxes. This $10,000 limit applies for both single and married filers and is not indexed for inflation.
The final bill also specifically precludes the deduction of 2018 state and local income taxes prepaid in 2017.
When House and Senate bills were first introduced, the deduction for state and local taxes would have been completely eliminated. The House and Senate passed bills would have allowed property taxes to be deducted up to $10,000. The final bill, while less beneficial than current law, represents a significant improvement over the original proposals.
Standard Deduction -The final bill provides a standard deduction of $12,000 for single individuals and $24,000 for joint returns. The new standard deduction is indexed for inflation.
By doubling the standard deduction, Congress has greatly reduced the value of the mortgage interest and property tax deductions as tax incentives for homeownership. Congressional estimates indicate that only 5-8% of filers will now be eligible to claim these deductions by itemizing, meaning there will be no tax differential between renting and owning for more than 90% of taxpayers.
Repeal of Personal Exemptions -Under the prior law, tax filers could deduct $4,150 in 2018 for the filer and his or her spouse, if any, and for each dependent. These exemptions have been repealed in the new law.
This change alone greatly mitigates (and in some cases entirely eliminates) the positive aspects of the higher standard deduction.
Mortgage Credit Certificates (MCCs) -The final bill retains current law. The House-passed legislation would have repealed MCCs.
Deduction for Medical Expenses- The final bill retains the deduction for medical expenses (including decreasing the 10% floor to 7.5% floor for 2018). The House bill would have eliminated the deduction for medical expenses.
Child Credit The final bill increases the child tax credit to $2,000 from $1,000 and keeps the age limit at 16 and younger. The income phase-out to claim the child credit was increased significantly from ($55,000 single/$110,000 married) under current law to $500,000 for all filers in the final bill.
Student Loan Interest Deduction -The final bill retains current law, allowing deductibility of student loan debt up to $2,500, subject to income phase-outs. The House bill would have eliminated the deduction for interest on student loans.
Deduction for Casualty Losses- The final bill provides a deduction only if a loss is attributable to a presidentially-declared disaster. The House bill would have eliminated the deduction for casualty losses with limited exceptions.
Moving Expenses- The final bill repeals moving expense deduction and exclusion, except for members of the Armed Forces. The House-introduced bill would have eliminated the moving expense deduction for all filers, including military.
Major Provisions Affecting Commercial Real Estate
Like-Kind Exchanges The final bill retains the current Section 1031 Like Kind Exchange rules for real property. It repeals the use of Section 1031 for personal property, such as art work, auto fleets, heavy equipment, etc.
The exclusion of real estate from the repeal of 1031 like-kind exchanges is a major victory for real estate stakeholders, who had fought hard to preserve the provision for several years, and against long odds.
Carried Interest The final bill includes the House and Senate language requiring a 3-year holding period to qualify for current-law (capital gains) treatment. Again, real estate stakeholders prevailed against long odds to preserve the incentive of capital gains treatment for carried interests in the final legislation.
Cost Recovery (Depreciation)-The final bill retains the current recovery periods for nonresidential real property (39 years), residential rental property (27.5 years) and qualified improvements (15 years). The bill also replaces separate definitions for qualified Restaurant, Leasehold, and Retail improvements with one definition of “Qualified Improvement Property.”
Qualified Private Activity Bonds -The final bill retains the deductibility of qualified private activity bonds used in constructing affordable housing, local transportation and infrastructure projects and for state and local mortgage bond programs. The House bill would have eliminated the use of private activity bonds.
Low Income Housing Tax Credit -The final bill retains current law. However, a lower corporate rate will negatively impact the value of the credits in the future, and will result in less low-income housing being developed.
Rehabilitation Credit (Historic Tax Credit)-The final bill repeals the current-law 10% credit for pre-1936 buildings, but retains the current 20% credit for certified historic structures (but modified so the credit is allowable over a 5-year period based on a ratable share (20%) each year).
The House bill would have entirely eliminated the Historic Rehabilitation Credit.
Provisions Not Included in the Final Bill:
Rental Income Subject to Self-Employment Tax
-The House-introduced bill would have subjected rental income to self-employment taxes. This provision was dropped from the House (and final) bill.
-Major Provisions Affecting Real Estate Professionals
– Deduction for Qualified Business Income- Because the new tax bill greatly decreases the tax rate for corporations (from the prior law’s 35% to just 21%), many Members of Congress believed that the business income earned by sole proprietors, such as independent contractors, as well as by pass-through businesses, such as partnerships, limited liability companies (LLCs), and S corporations, should also receive tax rate reductions. In addition to lower marginal tax rates, the final bill provides a significant up-front (above the line) deduction of 20% for business income earned by many of these businesses, but with certain conditions.
Specifically, the bill limits the 20% deduction to non-personal service businesses. Essentially, a personal service business is one involving the performance of services in the following fields:
Health, Law, Consulting, Athletics, Financial Services, Brokerage Services (not real estate), and “Any business where the main asset of the business is the reputation or skill of one or more of its employees or owners.”
It seems clear that most real estate agents and brokers will be considered in a personal service business and would thus not normally qualify for the 20% deduction.
However, NAR was able to help secure a major exception (the personal service income exception) in the final bill that will make it possible for many real estate professionals to be able to take advantage of the deduction.
This exception provides that if the business owner has taxable income of less than $157,500 (for single taxpayers) or $315,000 (for couples filing jointly), then the personal service restriction will not apply.
Above this level of income, the benefit of the 20% deduction is phased out over an income range of $50,000 for singles and an income range of $100,000 for couples.
For those with non-personal service income above these thresholds, the bill provides a second exception that may still allow a full or limited 20% deduction. This second exception (the wage and capital limit exception) places a limit on the deduction of the greater of:
50% of the W-2 wages paid by the business, or the total of 25% of the W-2 wages paid by the business plus 2.5% of the cost basis of the tangible depreciable property of the business at the end of the year.
Bottom Line: Independent contractors and pass-through business owners with personal service income, including real estate agents and brokers, with taxable income below the $157,500 or $315,000 thresholds may generally claim the full 20% deduction under the personal service income exception. Independent contractors and pass-through business owners with non-personal service income and total taxable income below these thresholds may also claim the full 20% qualified business income deduction. In addition, independent contractors (or other sole proprietors) with non-personal service incomes above these thresholds may also be able to claim a 20% deduction, but that deduction may be limited by the wage and capital limit exception.
The House and Senate started out with significantly different approaches to lowering the tax rate on qualified business income from sole proprietors and pass-through entities. The House bill featured a top rate approach while the Senate offered a deduction, which was set at 23% in the Senate bill. The House approach offered flexibility in allowing businesses with significant capital invested or wages paid. The final provision reflects a compromise between the different approaches. The provision generally follows the Senate proposal, but, at the request of the House, includes an additional factor related to the level of capital investment in the business.
The following examples (detailed in the Appendix) illustrate how these new changes would affect different real estate professionals based on how their income is earned, income they may claim from a spouse, and how their business is structured. NAR members should consult a tax professional about their own personal circumstances.
Example 1: Amy Agent, a single filer with sole income from real estate commissions
Example 2: Andy Agent, a married filer with children with income from his real estate business and W-2 income from his spouse
Example 3: Barry Broker, a single filer with income passed through his real estate LLC
Example 4: Bobbie Broker, a married filer with income passed through his real estate LLC and salary income from her spouse
Example 5: David Developer, a married filer with income from his development S corp, which also has wage employees and capital at risk
Section 179 Expensing
The final bill increases the amount of qualified property eligible for immediate expensing from $500,000 (current law) to $1 million. The phase-out limitations are increased from $2 million to $2.5 million.
The final bill expands the definition of qualified real property eligible for section 179 expensing to include any of the following improvements to nonresidential real property placed in service after the date such property was first placed in service: roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems.
The bill also significantly increases the amount of first-year depreciation that may be claimed on passenger automobiles used in business to $10,000 for the year in which the vehicle is placed in service, $16,000 for the second year, $9,600 for the third year, and $5,760 for the fourth and later years in the recovery period.
Denial of Deductibility of Entertainment Expenses
The final bill provides that no deduction is allowed with respect to:
An activity generally considered to be entertainment, amusement, or recreation;
Membership dues with respect to any club organized for business, pleasure, recreation or other social purpose, or
A facility or portion of a facility used in connection with the above items.
Thus, the provision repeals the present-law exception to the deduction disallowance for entertainment, amusement, or recreation that is directly related to (or, in certain cases, associated with) the active conduct of the taxpayer’s trade or business.
Taxpayers may still generally deduct 50 percent of the food and beverage expenses associated with operating their trade or business (e.g., meals consumed by employees on work travel).
Provisions Considered But Not Included in the Final Bill
Additional Withholding Requirements for Independent Contractors
Language in the Senate-introduced bill would have subjected Independent Contractors to an additional 5% withholding requirement. This provision was dropped from the Senate (and final) bills.
Expansion of Unrelated Business Income Tax (UBIT) for Non-Profits
The Senate introduced bill expanded UBIT treatment to include royalties derived from association licensing of trademarks or logos. This provision was dropped in the Senate (and final) bill. Additionally, tax writers considered subjecting certain exempt income (such as trade show or education revenue) to UBIT treatment these provisions were not included.
The legislation is complex and with so much partisan back and forth, you’re probably wondering, ‘What does this mean for women business owners?’
WIPP’s advocacy team has been busy parsing the legislation and, while we aren’t accountants or tax attorneys, we are giving you our best interpretation of a complex bill that just passed Congress and is on its way to the president for his signature.
One of the most important changes to the bill, that was not in the House or Senate version, is inclusion of some service businesses in the pass-through carve out. There are two interpretations of how the provision will work:
1. The carve out is limited to 20% of $157,000 for single filers and $315,000 for joint filers; OR
2. Business owners with taxable income under $157,000 for single filers and $315,000 for joint filers will qualify for a 20% deduction. Any business income above that amount is subject to a determination of 50% of the business W-2 wages or 25% of wages + 2.5% of the cost of depreciated property. The adjusted amount would be eligible for a 20% deduction.
The legislative language and explanation is not clear and despite asking the tax writers, we still do not have a definitive answer. It should also be noted that service businesses are not eligible for the deduction if: “A specified service trade or business means any trade or business involving the performance of services in the fields of health, law, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners, or which involves the performance of services that consist of investing and investment management trading, or dealing in securities, partnership interests, or commodities.”
DAILY REAL ESTATE NEWS | WEDNESDAY, DECEMBER 13, 2017
Republican lawmakers in conference committee Wednesday announced a tentative agreement on melding the House and Senate versions of tax reform into a final bill. A formal vote is expected soon. The National Association of REALTORS® is seeking changes to make the final bill less harmful to homeownership. Here’s a Q&A on what to look for over the next week or so based on a Facebook Live event NAR hosted yesterday.
Q. When might Congress have a final bill to send to the president?
A. The conference committee opened today with each member of the committee making statements. The committee is expected to report out a final bill by Friday. That bill must be passed by both houses of Congress. Those votes are expected Tuesday and Wednesday of next week, making it possible the bill could be before the president by Christmas.
Q. What is NAR’s position on the bills?
A. Both bills are bad for homeowners and home buyers as well as the larger economy. Both double the standard deduction and offset that cost by eliminating personal and dependency exemptions, and both eliminate most itemized deductions. These changes are a recipe for reducing the percentage of households that itemize from 30 percent to an estimated 5 to 6 percent. That matters for two reasons. First, if a household doesn’t itemize, it gets no tax benefit from being a homeowner versus a renter, a distinction that’s been in the tax code for 100 years. Second, five years down the road, if only 5 to 6 percent of households are itemizing, Congress could very well decide to eliminate the mortgage interest deduction and other deductions homeowners care about, on the grounds that too few prople take them to keep them in the code.
Q. What changes is NAR seeking?
A. There are three. First, take the Senate version on the MID, because it leaves the current law in place while the House would limit the maximum mortgage amount to $500,000, half the current limit of $1 million. Second, modify both the House and Senate bills on the capital gains exclusion on the sale of a principal residence. The exclusion is $250,000 for individuals and $500,000 for married couples. Both bills require a household to live in the house for five of the last eight years instead of two of the last five years, a change that will force many households to pay capital gains tax on their sale proceeds. The bills also phase out the exemption for households earning $250,000 or more. These provisions, if not changed back to current law, will prevent many households from selling and will penalize households that have to sell for reasons not entirely in their control, like death or job relocation. NAR estimates that 22 percent of homeowners sell their house after owning for less than five years. As a side note, forcing more households to pay the tax goes against the goal of simplifying the tax code, because figuring out the tax amount on the sale proceeds is one of the most complicated provisions on the individual side of the tax code. And third, restore current law on state and local tax deductions. Both bills retain the property tax deduction but cap it at $10,000. NAR would like to see that increased. Both bills also eliminate the income tax deduction, an especially big hit for households in high-tax states. NAR wants to see all or some of the deduction added back in. Among other things, eliminating the deductibility of the tax could force states to shift a greater share of the tax burden onto homeowners.
Q. What are some of the expected economic effects of the tax changes if improvements to the bill aren’t approved?
A. There are three: First, interest rates will go up, because the tax plan is expected to increase the U.S. budget deficit by up to $1.5 trillion over 10 years. Rising deficits tend to put upward pressure on interest rates. Second, home values will drop, by at least 10 percent on average on a nationwide basis, as markets adjust to the loss of tax incentives for homeownership. Because of that drop in prices, some households who have only recently bought or who buy in the next few years could find themselves underwater almost immediately. And third, economic growth could slow, the result of the hit on homeownership, which is still recovering from the economic downturn several years ago and which plays a key multiplier effect on the economy as buyers spend money on new furniture and remodeling projects, among other effects.
Q. Is the tax bill all bad for the real estate industry, or are there good things in it, too?
A. There are good things in it and NAR supports those. Among them, the Senate version of the bill would help small-business owners and others who operate their businesses as independent contractors or through pass-through businesses, such as partnerships, limited liability companies, or S corporations. Details are in flux on how these so-called pass-through entities will be treated, but they are likely to see their rates go down. The bill also has several positive aspects for commercial real estate; first among these is the treatment of 1031 tax-deferred like-kind exchanges. These exchanges are a big driver of commercial real estate transactions and both versions of the bill keep current law for real estate in place, as NAR sought. What’s more, the bills include positive provisions on business expensing and property depreciation.
Q. What was the response by REALTORS® as these bills were being considered in their respective houses?
A. REALTORS® delivered a record response to NAR’s Call for Action. More than 215,000 REALTORS® sent letters to their members of Congress. NAR President Elizabeth Mendenhall issued another Call for Action last week to help push for the changes NAR seeks during the conference committee.
In an upset, Democrat Doug Jones is projected to win Senate seat in Ala. race roiled by misconduct allegations against Roy Moore
By Washington Post Staff
December 12, 2017 at 10:26 PM
The Associated Press projected that Jones, a former U.S. attorney, defeated Moore, a controversial former judge, in a major upset. Moore faced allegations that, decades earlier, he had pursued romantic relationships with girls in their teens when he was in his 30s.
Jones’s victory in the special election is a seismic defeat for the GOP, President Trump and Trump’s former chief strategist, Stephen K. Bannon. The result will narrow the Republican majority in the Senate to 51 to 49 — and will place that majority in greater peril during next year’s midterm elections.