Wednesday, January 17, 2018

What does the new Tax Reform Bill mean for home buyers, sellers, and homeowners?

A few weeks ago, right around Christmas and just before the end of the year, the president signed the final version of the Tax Cuts and Jobs Act of 2017. The legislation -- two separate bills -- was advanced in both the United States House of Representatives and the United States Senate pretty quickly, then elements of the two bills were blended together (via a process known as "conference"), resulting in a final bill...

Regarding tax implications for homeowners, several items were on the table for pretty significant changes in both bills. And for a while it was difficult to determine what actually made it into the final bill that was signed into law.

Now that the chips have landed -- here is a summary of what is in the final bill that will affect residential home buyers, home sellers, and homeowners.

Capital Gains Exemption on the Sale of a Primary Residence
The good news here for sellers is the final bill had NO CHANGE. For as long as I can remember, the law has been that up to $250,000 (for individuals) or $500,000 (for married couples) of  the gain (aka profit) from the sale of a primary residence is exempt from capital gains tax, provided that you have lived in the home for at least 2 out of the last 5 years. Both of the original House and Senate bills sought to change this timeline for exemption to 5 out of the last 8 years. This would have placed a huge hardship on many homeowners. Life happens, and many people look to sell and move into larger homes, downsize, or relocate after a short time in a thankfully that change was not part of the final bill, and homeowners can still sell and take their equity with them, untaxed to those amounts, after 2 years.

Mortgage Interest Deductibility for Primary Residences
The good news here is that the final bill only capped tax write-off for mortgage interest at loan amounts of $750,000 or less. The original House bill sought to cap the mortgage interest deduction at loan amounts of $500,000 or less (in fact you may recall I made an appearance on the KCRA News when the original bill was announced). Overall this is still a reduction from the $1,000,000 cap that had been in place for as long as I can remember...though at $750,000 that will not affect too many people purchasing homes in the greater Sacramento region. Our current median home price in Sacramento County is in the mid-$300k range. For those with pre-existing home loans between $750,000 - $1,000,000 -- you are grandfathered in and may still write-off that mortgage interest. Also of note is that interest on home equity lines of credit (HELOCs) is no longer deductible, however it is still deductible on home equity loans (aka, second mortgages). Clear as mud, yes?

Mortgage Interest Deductibility for Second Homes
The good news here is that the final bill did not eliminate the mortgage interest deduction for second homes! The original House bill would have completely eliminated the mortgage interest deduction for second homes (aka vacation homes).

So that is enough information to use as a guideline. The National Association of Realtors also published a detailed Q&A which you can refer to here. Please be sure to confer with your CPA to determine how these things apply specifically to your situation.

No comments: