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$10,000 Cap On State And Local Tax Deductions In Play In Congress

January 6, 2020

Luxury home sales in Chicago’s lakefront neighborhoods and along the North Shore took a hit in 2018 and 2019, and experts say part of the downturn was caused by President Trump’s tax reform.

 

The Tax Cuts and Jobs Act of 2017 (TCJA) slapped a $10,000 maximum-deduction cap on state and local taxes, including real estate taxes. So, if you owned a luxury home with a $20,000 real estate tax bill, the maximum tax deduction you could take for it is $10,000.   

 

“Realtors say loss of the perk for a home seller or buyer to deduct the full amount of the tax bill has negatively impacted the sales of homes priced at $400,000-plus,” said Sara E. Benson, president of Benson Stanley Realty in Chicago.

 

For states like Illinois with high income and/or property taxes, the $10,000 limit on state and local taxes, called the SALT deduction, has been politically challenging. Republicans have generally defended the TCJA’s limitations while the SALT cap has been a political target of Democrats and real estate industry lobbyists.

 

The National Association of Realtors and National Association of Home Builders have lobbied heavily against capping state and local taxes at $10,000.

 

In December of 2019, the U.S. House of Representatives approved the Restoring Tax Fairness for States and Locality Act (HR 5377), which would temporarily lift the $10,000 maximum deduction cap. The vote of 218 to 206 was along party lines.

 

The U.S. Senate is not expected to take up the bill, and the White House has threatened to veto it.

 

In its Statement of Administration Policy, the White House explained it opposes the new bill because “the legislation would unfairly force all federal taxpayers to subsidize a tax break for the wealthy, as well as excessive government spending by fiscally irresponsible states.”

 

A last-minute amendment prior to passage in the House would retain the $10,000 SALT deduction cap for wealthy taxpayers with income in excess of $100 million.

 

As part of tax reform, the TCJA of 2017 lowered marginal tax rates, increased the standard deduction, and largely eliminated the Alternative Minimum Tax (AMT). It also made changes to itemized deductions, including lowering the mortgage interest-deduction cap and limiting to $10,000 the maximum deduction taxpayers may claim for state and local taxes.

 

The SALT deduction allows itemizing taxpayers to deduct from their taxable income the property taxes paid as well as either state and local income or sales taxes. Prior to TCJA, taxpayers could generally claim an unlimited SALT deduction.

 

The new Restoring Tax Fairness for States and Localities Act would make the following changes:

 

• For 2019, the SALT limit would be doubled for couples to $20,000. Singles would continue to have a $10,000 cap.

 

• For 2020 and 2021, the SALT cap would be eliminated for all taxpayers.

 

• For 2022-2025, the SALT cap would return to $10,000. Under TCJA, the SALT cap (along with many other provisions) will expire after 2025.

 

To offset the revenue loss, starting in 2020, the legislation would increase the top tax rate to 39.6% from its current 37%. In addition, it would restore the lower pre-TCJA bracket thresholds for the 39.6% rate, making more income subject to the higher tax rate.

 

Because the top tax-rate increase and bracket threshold changes are made permanent under the bill, and the SALT relief is temporary, the Committee on Joint Taxation estimates this bill will raise $6.2 billion in revenue over 10 years.

 

Freddie loan limit now $510,400

 

In 2020, the maximum loan limit for conforming Freddie Mac and Fannie Mae mortgages will increase to $510,400 from $484,350 for single-family properties, reported the Federal Housing Finance Agency (FHFA).

 

The loan limited will rise 5.38% in 2020 because the FHFA has determined that the average U.S. home value increased by that amount between the third quarters of 2018 and 2019.

 

FHA loan limit now $331,760

 

In 2020, the Federal Housing Administration loan limit for single-family homes will increase to $331,760 from $314,827. The FHA loan limit for 2-flats now is $424,800, while the limit for 3-flats is $513,450, and $638,100 for 4-flats.

 

For more housing news, visit www.dondebat.biz. Don DeBat is co-author of “Escaping Condo Jail,” the ultimate survival guide for condominium living. Visit www.escapingcondojail.com.

 

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“The book is Escaping Condo Jail by Sara Benson and Don DeBat. I would say that anybody thinking about buying a condo, or even anybody serving on a condo board, or anybody who has any connection to a condo, this is must reading—all 600 and something pages. Thanks a lot for a great book!”

 

Steve Sanders, “Your Money Matters” WGN TV, December 22, 2014

By Don DeBat

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