Last week, the U.S. Senate passed tax reform legislation. But how, exactly, will that affect homeowners?
It’s a concern we’ve heard expressed many times since the legislation passed and one that we as homeowners worry about, too.
The National Association of Realtors® believes it may put home values at risk and dramatically undercut the incentive to own a home.
NAR President Elizabeth Mendenhall, a sixth-generation Realtor®, echoed those same concerns with the bill saying, “The tax incentives to own a home are baked into the overall value of homes in every state and territory across the country. When those incentives are nullified in the way this bill provides, our estimates show that home values stand to fall by an average of more than 10 percent, and even greater in high-cost areas.
” … [W]hile there are some winners in this legislation, millions of middle-class homeowners would see very limited benefits, and many will even see a tax increase. In exchange for that, they’ll also see much or all of their home equity evaporate as $1.5 trillion is added to the national debt and piled onto the backs of their children and grandchildren.”
So what can homeowners do?
While lawmakers work out the details – with the end of the year as their deadline – homeowners may want to anticipate various provisions that could affect what they can – and can’t – write off.
It is expected that most deductions currently available to individuals may disappear under both versions of the bill so here are the tax-bill provisions that could change the tax benefits of owning a home, along with some strategies to maximize deductions before the tax code changes.
Property taxes: Both the Senate and House version of the bill will only allow property tax deductions up to $10,000 – current law allows you to write off the full amount of taxes paid – while eliminating other write-offs for state and local taxes.
Solution? For homeowners not subject to the AMT, prepaying some 2018 property taxes this year could boost the value of your deduction.
Mortgage interest deduction: Currently, you can take a deduction for the interest you pay on up to $1 million of mortgage debt (plus $100,000 of home equity debt) for your first and second homes. Although the Senate bill retains that ceiling, the House bill reduces the cap to interest paid on $500,000 of mortgage debt, limiting the deductibility of mortgage interest to primary residences only. So interest on loans for vacation homes, qualifying recreational vehicles and boats may no longer be deductible if the provision makes it into final legislation.
Solution? The IRS gives you a one-month reprieve so you can prepay January’s mortgage payment in December and write it off this year. Just make sure the Form 1098 sent by the lender to both you and the IRS reflects the payment to avoid triggering a red flag with the IRS.
Selling your home: Currently, when homeowners sell their home, they can exclude the first $250,000 ($500,000 for joint filers) from capital gains taxes if they have lived there for two of the five years preceding the sale. However, both the Senate and House bills would change that requirement to five of the past eight years. So if you were thinking about selling your house in the next couple of years but have only lived there for a short time, you could owe taxes on any gain from the sale.
Solution? You may want to consider staying put a little longer to meet the new minimum residency requirements.
While nothing is yet set in stone and few of us are particularly clear on how – or if – any of these proposed tax changes will affect us, it’s always best to be proactive and plan a long game for the financial health of one of your biggest investments – your home.