President Trump signed the Tax Cuts and Jobs Act on December 22, 2017. With all of the different Senate and House versions of this tax reform, and the fact that the final law is nearly 200 pages, it would be helpful to have some additional clarity. The impact of the reform rests a lot on the particular taxpayer, whether homeowner, business owner, real estate professional, etc. The summary below focuses on the major provisions of the law as they relate to home ownership.Exclusion on Gain on Sale of Home
The original bills from the Senate and the House both would have changed the amount of time a homeowner must live in their home to qualify for the capital gains exclusion from 2 out of the last 5 years to 5 of the last 8 years. This likely would have had a major impact on Colorado’s already super tight housing inventory. Many home sellers living in their homes only three or four years might have delayed selling their homes for another year or two to avoid capital gain on the sale.
The good news is that the final bill scrapped the tenure change so the exclusion rule remains as it is today: if you live in your home 2 of the last 5 years you can exclude up to $250,000 of gain as a single filer and up to $500,000 as married filers.
Mortgage Interest Deduction
The original House bill would have eliminated interest deduction for second homes and reduced the limit on deductible mortgage debt to $500,0000. The final bill is much better for homeowners. The final bill reduces the limit on deductible mortgages from $1 million to $750,000 and it keeps the interest deduction on second homes in place. The reduced mortgage limit of $750,000 only applies to mortgages originated after 12/14/2017. Interest remains deductible on existing mortgages up to $1 million. Homeowners with grandfathered $1 million loans can also refinance those loans and maintain the $1 million deduction limit, so long as the new loan amount does not exceed the amount of the mortgage being refinanced.
In certain markets where $750,000 mortgages are the norm, the new bill could have a negative impact on home prices. In Colorado, where the median home price is below $400,000, the mortgage interest limit from $1 million to $750,000 probably won’t have much of an impact.
Deduction for State and Local Taxes
The initial Senate and House bills would have eliminated the ability to deduct state and local property taxes. The final bill retained the ability to deduct property taxes, but caps the amount of the deduction at $10,000 for both single and married filers. In certain states, where property taxes are higher, the $10,000 limit is significant. In Colorado, however, where property taxes remain comparatively low, the deduction limit is unlikely to have much of an impact on our housing market.
The final bill increases the standard deduction to $12,000 for single filers and $24,000 for joint filers. Doubling the standard deduction makes it less likely that homeowners will choose to itemize deductions for mortgage interest and property taxes. In other words, the tax advantages as a homeowner (through mortgage interest and property tax deductions) won’t be as significant under the new law. Some real estate professionals worry that without a significant tax differential between renting and owning a home, more people will choose to continue to rent, reducing the demand for homes and lowering prices. What do you think? Would you choose to buy a home even if you realize no additional tax savings over renting?