3 Ways Tax Reform Affects Your Real Estate Investments

3 Ways Tax Reform Affects Your Real Estate InvestmentsThe Tax Cuts and Jobs Act of 2017 instituted some of the most dramatic changes to the financial landscape in the United States in over 30 years. These adjustments to the IRS code have an effect on everyone who earns and spends money in this country.

What changes can real estate investors expect to see from the new legal standards?

Higher Standard Deduction, Less Itemized Deductions

Before the reforms, single tax filers were allowed a standard deduction of $6,350. Married couples filing jointly were given $12,700. The standard deduction is the amount of income you can earn before any income taxes are applied. If a married couple made $50,000 in one year, they would only pay taxes on $37,300. With the new laws, single filers receive a $12,000 deduction and married couples get $24,000.

However, with the increased standard deduction comes significant decreases in itemized deductions. Many smaller real estate investors depend on tax credits for homebuyers to make their purchases more profitable. Those have been removed from the list of approved deductions.

Real estate investors need to adjust their strategy to take full advantage of new tax trends. Rather than focusing on flipping homes for profit, investors may consider holding on to properties and leasing them as rental units.

Mortgage Tax Deduction Changes

Homeowners who live in their primary property are still allowed to deduct a portion of the interest paid on their monthly mortgage. However, those who have taken out home equity lines of credit are no longer able to claim a deduction for those interest payments.

This is a big change for some real estate investors. It’s a common strategy to use home equity lines of credit to finance other projects. Without the extra deduction, these loans are still a great option for quick cash. However, investors will take more time to realize profits with this strategy.

Decrease In State And Local Tax Deductions

Investors use state and local tax deductions to increase their return on investment. Under the new rules, property owners are limited to a $10,000 maximum deduction. Real estate investors who operate in high-income areas will see a significant increase in their yearly tax bill. The $10,000 limit is unlikely to offset the high price of property taxes in places like California and New Jersey.

Newer investors who don’t hold a lot of properties can consider buying in markets with lower state and local tax rates. Those who are currently invested could sell some of their lower-producing properties to lighten the burden on their tax bills.

The new tax laws are a challenge for real estate investors. But with some planning and the right information, your business can still produce a generous profit.

Be sure to consult with your trusted home mortgage professional to find out about the best financing options for your situation.

Reasons To Think Twice Before Paying Off Your Mortgage Too Quickly

Reasons to Think twice before paying off your mortgage too quicklyMost of the financial advice out there is focused on how you can pay off the mortgage on your home as quickly as possible, from making lump sum payments to switching to bi-weekly payments rather than monthly.

However, there are a few things that you might want to consider before you put all of your financial efforts into paying off your mortgage as quickly as possible.

Diversifying Your Investments

Of course, paying off your mortgage as fast as possible has a number of obvious advantages. You will be able to own your home a lot sooner and you will decrease the amount of interest you pay over the years. However, are you diversifying your assets?

Savvy investors know that they should decrease their risk by spreading their money into a number of different types of assets and investments so that they don’t have “all their eggs in one basket.”

If you have extra money and you want to invest it, you might want to make sure that you have a variety of investments including savings, stocks and bonds, rather than just investment in your home.

Liquid Assets

Another thing to consider is that having your money invested in your home means that it will not be a very liquid asset. If you needed the cash right away, you could have to sell your home or take out a home equity loan, which is a complex and time consuming process.

Before investing all of your money in your mortgage, consider creating an emergency fund as well so that you have some easily accessible money when you need it.

Earning More With Better Investments

Before investing all of your money in your mortgage, find out whether you would be able to earn more by investing it into other opportunities such as interest-bearing bonds. Sometimes stocks, bonds and mutual funds have better returns over time than the typical mortgage interest rates.

Perhaps paying off your mortgage as quickly as possible is the best option for you. However, make sure that you consider all of the factors before committing to this decision.

To find out more about mortgages and your home, contact us today.