In this third article of the series, we highlight a couple of “near misses” that make a big impact on your real estate planning.
Exclusion of Capital Gains on the Sale of a Personal Residence remains unchanged
1031 Tax Deferred Exchanges saved for Real Estate (not for other property though)
Application of Self-Employment Tax on Real Estate Income rejected
Most homeowners are aware of the $500,000/married couples and $250,000/singles exclusion of capital gain from the sale of your personal residence. In order to qualify for this exclusion, you must have lived in your personal residence for 2 out of the last 5 years. Both the original House and Senate bills had increased this requirement to be 5 out of the last 8 years. And, the House had wanted to also phase out this exclusion for high-income earners (income above $250,000 single/$500,000 married). The National Association of Realtors (NAR) strongly lobbied Congress to reconsider these changes since we have been experiencing a substantial shortage in national housing inventory and such a tax change would only exacerbate this very real problem. The good news is that NAR was successful with this fight and this tax law was left unchanged.
Another victory was secured for investors selling investment properties. Although modifications to the 1031 tax-deferred exchange law were made, this tax-deferred benefit was preserved for real estate. Taxpayers can no longer defer taxes by entering into like-kind exchanges of personal property, such as artwork or machinery, but the tax deferred benefit of like-kind exchanges of real property remains in tact.
Like-kind real property for the purposes of this provision is broadly interpreted to include an exchange of commercial property for residential property or property in CA for property in NY (but, does not include foreign real property).
One additional victory for real estate investors relates to self-employment tax. Self-employment tax is payroll tax on earnings of those that are self-employed. The original House bill expanded the application of this self-employment tax to income earned on rental properties. Fortunately, in another win, this provision did not survive in the final TCJA signed by the president.
Join us for the fourth of these 6 articles coming soon.