This column is written by Metro DC Houses, a local real estate team serving DC, MD, VA made up of Colin Johnson, the immediate past President for the D.C. Association of Realtors and Christopher Suranna, the current President for the D.C. Association of Realtors.
For those of you that don’t have knowledge of the cult classic movie “Office Space”, the strange character Milton Waddams has an obsession with his Red Swingline stapler.
In one of the last scenes of the movie he is sitting on a beach and demands a margarita with NO SALT or he’d… For those “Office Space” fans I have buried another movie reference, enjoy!
Well that’s a long story to hook you in to talk about taxes, specifically SALT taxes (State and Local Taxes) that have recently been limited with the passage of the Tax Cuts and Job Act. Plus some other interesting updates.
To Itemize or Not to Itemize, that is the question. A lot of this is going to be based on your total income and available deductions. If you are not going to itemize, stop here. I am of no use to you, unless of course you want to catch the movie reference. If you are going to itemize please enjoy the following.
The SALT tax is now limited to 10K and if in the state of Maryland or other higher local tax areas it is very likely you will hit your maximum deduction fairly quickly.
Show me that “O” Zone — the relatively unused section of tax code that has been updated. According to NAR’s (National Association Realtors) recent Realtor Magazine published in the March — April 2019 edition: “The launch of the qualified opportunity zone program means that in return for rolling over the profits from the sale of a capital asset like real estate or company stock into certain economically disadvantaged areas, investors can delay paying capital gains taxes of those profits through 2026.”
If they keep the investment for at least five years, 10 percent of the investment is not taxed, hold it for seven and it increases to 15 percent.
Steve Shushner Esq. President of District Title also, highlighted some often-overlooked deductions:
“A reminder to check your settlement statement for deductible items that may not appear elsewhere (i.e. points/origination charges, mortgage interest — if less than $600 most mortgage companies don’t report) so if you closed at the end of December, the days left in the month might not otherwise show up or if the 1st mortgage company sold it almost immediately it might not show up, property taxes paid on a HUD.”
When selling your property, the $250K/$500K (single/married) exemption is based on actual profits, so pull all HUDs including refinances, in order to determine costs you paid (whether financed or not) that will affect your basis.
Remember to deduct unamortized origination charges (points) when a loan is paid off. This applies when you sell or if you refinance out an old loan (remember that points paid in a primary residence purchase are deductible to you in the year of the purchase, but refinance points and investment property points are amortized over the life of the loan).
In regard to the $750K/$1M deduction, it applies to primary residence, but for rowhouses with basement units you have to allocate square footage between primary and rental property, so in reality a mortgage of well over the limit may still be fully deductible.
When buying from a foreign national remember that the buyer is personally liable for the seller’s payment of FIRPTA taxes and this could vary as much at 10-15% of the sales price.
Don’t forget capital gains tax when you sell or depreciation recapture tax on an investment property.
Just as a note as always check with your own legal and tax professionals as your specific financial information will determine your tax and legal responsibilities.