Municipalities around u. S . A. This week has visible a surge in homeowners prepaying their belongings taxes as they brace for the first-rate trade-in deductions from the Republican tax law to go into an impact on January 1. Last week, President Donald Trump signed the bill into regulation after months of legislative wrangling on Capitol Hill, marking one of the most drastic overhauls of the federal tax code in many years. The law gets rid of the Affordable Care Act’s so-referred to as person mandate, opens elements of Alaska up to grease drilling, and upends the tax code for people and agencies, amongst different changes.
But many excessive-stop owners can be paying greater in belongings taxes the subsequent year because of a new rule that caps the quantity of nation and nearby tax deductions at $10,000. Since there is currently no restriction on this deduction, humans are speeding to prepay their belongings taxes now, before the cap kicks in on the flip of the new yr.
From Virginia to Massachusetts and New York to California, municipalities – ordinarily in areas with higher stages of country and neighborhood income taxes – have visible a beautiful growth in assets tax receipts in current days.
It’s been insane here,” James McAuliffe, the metropolis treasurer in Milton, Massachusetts, advised The Wall Street Journal. “Thank you, Mr. Trump, for fixing my cash-go with the flow issues. It’s emerging as a costly town. McAuliffe envisioned that roughly 1/2 of Milton’s residents would be stricken by the new $10,000 cap. The restriction additionally covers kingdom and local income and income taxes, but the invoice prohibits humans from prepaying one’s taxes. Lawmakers left the prepayment of belongings taxes up to neighboring municipalities.
High-earnings taxpayers who itemize their deductions presently advantage the maximum from the unlimited state and nearby tax deduction, typically called SALT. Individuals with incomes higher than $a hundred 000 make up roughly ninety% of the deduction’s beneficiaries, in keeping with an analysis through the Tax Foundation.
This approach that owners in excessive-income and high-tax states like New Jersey, New York, California, Illinois, Texas, and Pennsylvania will bear the brunt of the change. The Republican tax invoice marks the result of Trump’s first essential legislative achievement as president almost 365 days into his first term. The bill will cross into an impact on January 1, 2018.
The Alternative Minimum Tax is a critical consideration for taxpayers who own real estate because just about every tax rule applying to real estate is different for the AMT than for the Regular Tax. This article on Real Estate and the AMT will address those situations where the individual holds the real estate as an investment, typically as the rental property. The differences in tax treatment between the Regular Tax and the AMT can be significant.
Interest paid on the mortgage was taken out to acquire the property is fully deductible, both for the Regular Tax and the Alternative Minimum Tax. Unlike itemized deductions that allow a tax benefit for what amounts to personal expenses, the tax law generally allows all deductions a taxpayer has to make in the pursuit of business income. Thus, the limitations discussed in the previous article on home mortgage interest do not apply.
If, however, the equity in the rental property is used as security for an additional loan – a second mortgage, for example – then the taxpayer must look to how the proceeds of that loan are used to determine interest deductibility. If the proceeds are used for a car loan or to finance a child’s education, for example, then the interest is nondeductible personal interest. If the proceeds are used to improve the rental property, the interest is deductible. Suggestion – it is best that taxpayers keep personal borrowings separate from business borrowings. Mixing the two creates recordkeeping challenges and can result in disputes with the IRS.
Property taxes paid on rental or investment property are allowed in full both for Regular Tax purposes and the Alternative Minimum Tax. Planning idea – if you have an opportunity to pay your property tax bill either this year or next, pay it in a year when you have enough income from the property not to generate a rental loss. This strategy can help avoid triggering the passive activity loss limitations described below.
For example – in Florida, property tax bills are mailed in October and are payable under the following discount schedule: November – 4%, December – 3%, January – 2%, February – 1%. If you have a loss from the property in 2010 but expect to generate income in 2011, do not pay your bill in November or December – forgoing that small discount could help you avoid the loss-limitation rules.
Depreciation is allowed for property held for investment. The portion of the cost allocable to land is not depreciable, but for the building itself and the furniture, appliances, carpeting, etc., a depreciation deduction may be taken. Real property (this is the legal definition of the house or other building) held for rental/investment may only be depreciated for Regular Tax purposes under the “straight-line” method over a useful life of 27.5 years. Thus, a property with $275,000 allocated to the building would be depreciated at the rate of $10,000 per year.
Personal property (this is the legal definition of things such as furniture, appliances, carpeting, and the like) may be depreciated for Regular Tax purposes under an “accelerated” method over a useful life of five years. An accelerated method allows a larger depreciation deduction in the early years to recognize the obsolescence or decline-in-value factor that you see in new property (cars are a good example).
However, for purposes of the AMT, personal property may be depreciated only by using a straight-line method. Thus, an AMT item will be generated in the early years if the accelerated method is used. Planning idea – for personal property, consider electing the straight-line method for Regular Tax purposes. While giving up a little tax benefit from the greater depreciation in the early years could mean avoiding paying the AMT.
Active/passive investment rules and the “at-risk” rules The at-risk rules similarly deny using these types of losses to the extent the taxpayer has acquired the investment with borrowed money and does not have personal liability on the debt. Planning lining idea prepays property If these loss limitations apply, consider the planning ideas mentioned above to minimize the losses generated each year. They are not doing you any good anyway.