As the summer temperature heats up in Austin, so to is the debate surrounding the recently released Tax Reform Act of 2014 Discussion Draft. Developed in part to help quell frustrations concerning the US’ complex/confusing tax system, the Discussion Draft’s proposals could have a major impact on Texas’ real estate market. Although it is unlikely that any changes will occur in 2014, given it’s an election year, drastic change could be on the horizon.
As set forth in the Discussion Draft, two advantageous real estate tax provisions are scheduled to be reduced or eliminated, namely:
- Mortgage Interest Deduction: Currently, taxpayers are able to claim an itemized deduction for qualifying mortgage debt up to $1 million. However, under the proposed plan, this $1 million amount is reduced to $500,000 by 2018. As a result, the amount of mortgage interest a taxpayer can deduct is greatly reduced under the proposed plan. This could potentially have a major impact on the real estate and banking industry as it could impact a taxpayer’s decision to purchase a home that requires financing in excess of $500,000.
- 1031 (aka: Like-Kind) Exchanges: Currently, taxpayers are able to defer the recognition of capital gains associated with the sale of real property when the proceeds of the sale are properly reinvested into a qualifying 1031 exchange property. However, under the proposed plan, 1031 Exchanges taking place after December 31, 2014 will generally be disallowed. As a result, taxpayers looking to defer their recognition of capital gains by utilizing a 1031 exchange may have to revaluate their investment strategies. By eliminating a taxpayer’s ability to defer their recognition of capital gains, it could greatly impact their decision and ability to reinvest in real estate. As a result, investors desirous of pursuing a future 1031 exchange should evaluate the risks associated with waiting when considering future 1031 exchanges.
Real estate owners and investors need to pay careful attention to the above referenced proposed changes in order to best determine their proper course of real estate action. Further, for persons looking to take advantage of existing tax laws before the proposed rules are set to take place, now is the time. After all, nobody plans to fail… they simply fail to plan.