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| Each week, the Silicon Valley Association of Realtors (SILVAR) shares local housing data, sales trends, expert insights and other real estate-related topics. This week, the association provides an explainer on how tax reforms could impact real estate and estate planning. |
Since the start of the current federal administration, there has been much discussion on potential changes to the tax code primarily focusing on the expiration of the 2017 Tax Cuts and Jobs Act at the end of 2025 and its impact on real estate and estate planning. While most of the provisions in the legislation will likely be extended, changes to certain provisions in this law may affect taxpayers’ options when it comes to buying and selling a home.
The most notable change could be a deduction in the lifetime gift and estate tax exemption, which is a common tax planning tool often used to give real estate to the next generation of family to reduce estate taxes. The current lifetime gift and estate exemption for an individual taxpayer is $13.61 million. At the end of 2025, this amount is set to be cut in half unless Congress extends this provision.
Homeowners paying a mortgage also could see changes to the amount they are able to deduct from their taxes. Currently, under the act, homeowners can claim a deduction on properties up to $750,000 in value. Once the Jobs Act expires, the deduction could be eliminated altogether, allowing for much greater tax breaks, or the cap could be lowered to $500,000, meaning much lower tax benefits, according to a list of possible tax reform ideas from lawmakers published by the New York Times in January.
There also could be changes to the state and local tax (SALT) deduction. Taxpayers can currently itemize and deduct only up to $10,000 from property, sales or income taxes paid to state and local governments. If this provision expires, there would no longer be a cap on deduction amounts. Lawmakers, however, have floated other ideas, including raising the cap to $20,000, or doubling the amount for couples filing jointly.
If the Jobs Act provision for the SALT deduction is extended and the $10,000 cap stays in place, high-income earners in high-tax states like California, won’t see significant benefits since homeowners use itemized tax deductions for things like mortgage interest and property taxes, which typically have values much higher than $10,000.
Capital gains
Currently, there is no proposal to increase or decrease the amount of capital gain from the sale of a person’s primary residence that can be excluded from their taxable income. Right now, individuals can exclude up to $250,000 and couples can exclude up to $500,000 on their joint return.
Similarly, no proposed changes currently exist for a “1030 exchange,” which is a tax deferral that allows investors to avoid paying a capital gains tax on the sale of real estate if the proceeds are reinvested into a similar, or “like-kind,” property.
While capital gains tax rates are expected to remain stable, the federal government could use the Net Investment Income Tax – a 3.8% surtax collected on incomes, estates and trusts above a certain amount – to help fund Social Security and Medicare benefits.
Cuts to IRS budget & workforce
With no tax law changes in 2024, any new tax legislation passed by Congress will not affect how taxes are filed this year. However, with the Internal Revenue Service (IRS) experiencing major staffing reductions and budget cuts, the agency may have difficulties processing returns and responding to inquiries in a timely manner.
Silicon Valley Association of Realtors (SILVAR) is a professional trade organization representing 5,000 Realtors and affiliate members engaged in the real estate business on the Peninsula and in the South Bay. SILVAR promotes the highest ethical standards of real estate practice, serves as an advocate for homeownership and homeowners, and represents the interests of property owners in Silicon Valley.
The term Realtor is a registered collective membership mark which identifies a real estate professional who is a member of the National Association of Realtors and who subscribes to its strict Code of Ethics.
