The Tax Cuts and Jobs Act brings change to the housing market
Not everybody is pleased to hear that property values are going up. Take the homeowners who live in Las Vegas, Nevada, for example. On the plus side, they’ve seen home prices there rise by 100 percent in just the past five years.
The yang to that yin? Property taxes this year are 38 percent higher than they were 12 months ago. Now, imagine you’re a homeowner in Jersey City, New Jersey – just right across from Manhattan, New York. Location, location, location. The gentrified Jersey City has seen property values go up an astounding eightfold-plus. The average townhouse owner there has been hit with tax hikes that translate to about $1,500 a month. New tax laws might help you take some of the stings out of your newfound property value wealth.
But first, the bad news
The days of relying on claiming the full amount of your property taxes as a liability when you itemize are gone. The Tax Cuts and Jobs Act now allows you to claim only up to $10,000 in state and local tax deductions.
It’s not such a big deal for Florida residents. The IRS calculates that the average deduction claimed for property taxes last year was almost $7,400. Compare that to Connecticut, where the average deduction last year was over $19,600.
With that foundational piece missing, the shelter of property tax deductions may bring everything down around you like a house of cards. With the $10,000 cap, it’s likely that far fewer filers will meet the deduction minimum to itemize – especially when the new tax laws also doubled the standard deduction for a married couple filing jointly. That’s now boosted up to $24,000. How can you take some of the bites out of these unfortunate tax law changes? By taking advantage of other new tax law changes.
It’s the Gig Economy, remember? Arrange to work from home and take the home office deduction. You can do it the easy way and just deduct $5 per square foot for a home office that’s up to 300 square feet.
Or, go into full-on detail mode and calculate your deduction based on the actual expenses. This means you’ll take everything into consideration – including the appropriate percentage of the real estate taxes that can be attributed to the area of your home office.
This may give you a bigger deduction but be sure you have the receipts to prove your calculations to the IRS. It’s why they call the $5 per square foot option the “safe harbor” method.
One last thing about this potential strategy for reducing your property tax burden: Your home business does have to show a profit to take the home office deduction.
Landlord as a business
Taking on a tenant can be one way to push back against the rising tide of property taxes. Rental income can offset this liability. Be sure to set yourself up as an LLC or an S-corporation. It positions you to take advantage of new tax law provisions allowing you to be known as a pass-through entity, which may make you eligible for a 20 percent deduction on your qualified business income.
A pass-through entity is a business that doesn’t have to pay corporate income tax. The business profits get passed through to the owner, who reports this income on their individual return.
Be prepared, though, to up your level of diligence. You’ll want to separate rental-related revenue and expenses from your personal finances. You’ll also need to know what’s deductible. For example, just because you’re now a business owner, it doesn’t mean your home just became a capital purchase. You won’t be able to deduct depreciation.
These are just two opportunities that can help reduce your property tax liability. Keep in mind, though, that the new tax laws won’t prevent the full property tax bill from being paid when it’s due. These are ways to recoup, not reduce.
If you are in the market – for an agent or a rental property – Dante DiSabato can help you with both. Start the primary search on your own or contact Dante DiSabato, who can do it for you. Dante is dedicated to achieving reliable results for all of his customers, as long as you give him the opportunity – online or at an open house.