2018 Tax Reform Highlights Including Implications for 1031 Exchange Transactions

The “Tax Cuts and Jobs Act,” the highly-publicized tax reform initiative became law of the land on January 1st, 2018.  There’s great news for 1031 Exchange investors.  While previous tax reform initiatives and proposed federal budgets threatened to cap the amount of capital gains that could be deferred,  the final legislation preserved virtually all components of the tax code pertaining to 1031 Exchange and real estate transactions.   However, deferring capital gains taxes on “personal property” (heavy equipment, vehicles, aircraft, artwork, franchises and intangibles) is no longer allowed under the tax bill signed into law on January 1st.

So, how do the latest changes in the tax code impact individuals and businesses?   What follows is a brief summary of the changes in the tax code enacted for 2018.  It’s in the best interests of both private parties and investors to discuss the ramifications of the new laws with a tax professional.

Individual Tax Plan Changes include:

• For tax years beginning after Dec. 31. 2017 and before Jan. 1, 2026, seven tax rates apply for individuals: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The Tax Cuts and Jobs Act also provides four tax rates for estates and trusts: 10%, 24%, 35%, and 37%.
• The Act eliminates most itemized deductions. It keeps deductions for charitable contributions, property taxes, mortgage interest, and retirement savings.
• It limits the deduction on mortgage interest to the first $750,000 of the loan. Interest on home equity lines of credit can no longer be deducted. Current mortgage-holders aren’t affected.
• Taxpayers can deduct up to $10,000 in state and local taxes. They must choose between property taxes and income or sales taxes.
• The standard deduction is doubled.
• The Act repeals the Obamacare tax on those without health insurance.
• It eliminates personal exemptions.
• The Act doubles the estate tax exemption to $11.2 million for singles and $22.4 million for couples.
• The Alternative Minimum Tax remains. It increases the exemption from $54,300 to $70,300 for singles and from $84,500 to $109,400 for joint. The exemptions phase out at $500,000 for singles and $1 million for joint. The exemption reverts to current levels in 2026.
• The Act increases the Child Tax Credit from $1,000 to $2,000. Credit is refundable up to $1,400. It increases the income level from $110,000 to $400,000 for married tax filers.
• It allows a $500 credit for each non-child dependent.

Business Tax Plan Changes include:

• The Act lowers the maximum corporate tax rate from 35 percent to 21 percent.
• It raises the standard deduction to 20 percent for pass-through businesses. The deductions are limited once the income reaches $157,500 for singles and $315,000 for joint.
• The Act limits corporations’ ability to deduct interest expense to 30 percent of income. For the first four years, income is EBITDA, but reverts to earnings before interest and taxes thereafter.
• It allows businesses to deduct the cost of depreciable assets in one year instead of amortizing them over several years. It does not apply to structures. To qualify, the equipment must be purchased after September 27, 2017, and before January 1, 2023.
• The Act eliminates the corporate AMT.

For more information on 1031 Exchange-related topics, please contact Steven Rosansky Esq., Senior Director of Exchanges, at (949) 836-7604 or steven@peakexchange.com