Near the end of 2017, federal lawmakers passed a major overhaul of the tax structure, known as the Tax Cuts and Jobs Act, which has many people trying to understand the major changes. Gregory Ferraris, principal accountant with GNFerraris LLC in Sag Harbor, answered several questions about the new tax legislation as it pertains to real estate.
Local and national news media have reported that the Tax Cuts and Jobs Act will heavily impact Long Island homeowners, possibly more so than residents in other states. How accurate is this, in your opinion? Why or why not?
Whether an individual is heavily impacted or not is all relative to his or her unique circumstances. On a wide-scale basis, individuals residing in locales which have high local and state taxes will feel the brunt of a reduced deduction, although this reduction will be mitigated by those individuals who historically have been subject to alternative minimum tax and overall lower tax rates. Since 2013, high-income taxpayers have already been subject to SALT reductions, so the impact will be minimal.
With your knowledge of both the new tax structure and local real estate development, to what extent do you think the elimination of deductions for interest on home equity debt will influence the local real estate market in general?
In today’s interest rate environment, the cost of borrowing funds on a home equity loan is quite inexpensive; therefore, the tax savings are minimal and should not have any material influence on any continued real estate development.
How does the Tax Cuts and Jobs Act impact taxes for commercial property owners?
It really depends on their respective entity structure. The new 20 percent “QPI” deduction will benefit pass-through entities such as LLCs, S-Corporations and partnerships, including those involved in commercial real estate activities. Entities that are formed as a C-Corporation will benefit from a reduced tax rate of 21 percent, down from 35 percent. In addition, small businesses producing tangible goods and services will benefit greatly.
Are there any smart steps people can take, going forward, to limit the effect that the Tax Cuts and Jobs Act will have with regard to the $10,000 limit on the aggregate deduction for state and local property taxes?
Yes, you should immediately schedule a meeting with your local CPA to discuss unique tax planning strategies. Overall, the general population should see a modest decrease in their federal tax liability while high-income personal service professionals will bear the increase.