Would a new tax plan save you money or cost you money? The answer depends on a complex array of factors that touch on just about every aspect of your financial life. This article is about a subset of your finances: How tax reform would affect homeownership and mortgages.
The House and Senate passed separate versions of tax reform in November and December. Then Republican negotiators met in the first half of December to agree on a compromise bill to be passed by both chambers. Republicans announced the night of Dec. 13 that they had arrived at a compromise, but they have yet to release details. A few details leaked out anyway, according to news reports, but Congress had not released official wording as of Dec. 15.
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Here’s how six tax changes would alter homeownership, home selling and moving.
1. Mortgage interest deduction
The mortgage interest tax deduction is touted as a way to make homeownership more affordable. It cuts the federal income tax that qualifying homeowners pay by reducing their taxable income by the amount of mortgage interest they pay. The deduction would be scaled back under the compromise bill, according to news reports.
2. Property tax deduction
The current tax law eases the pain of paying property taxes by allowing qualifying taxpayers to reduce their taxable income by the total amount of property taxes they pay. In the compromise bill, the deduction would be limited to a total of $10,000 for the cost of property taxes and state and local income taxes, according to news reports.
3. Home equity deduction
On top of the mortgage interest deduction, current tax law adds a deduction for interest paid on home equity debt “for reasons other than to buy, build, or substantially improve your home.” So, for example, if you borrow from a home equity line of credit to pay tuition, the interest you pay is tax-deductible.
The fate of the home equity deduction in the compromise bill was unknown as of the morning of Dec. 15, according to news reports.
4. Capital gain exclusion
When you sell a house, the capital gain is the difference between the price you paid for it and the price you sold it for. This capital gain is treated as taxable income. If you owned the house long enough, you’re allowed to exclude up to $500,000 of this capital gain as income so you don’t have to pay federal income tax on it. (The exclusion is capped at $250,000 for married taxpayers filing separately.)
The House and Senate bills would tighten the time limits under which you could exclude your capital gain. The dollar amounts would stay the same, although the House bill phases out the exclusion past a certain level of income. Details of the capital gains exclusion in the compromise bill were unknown as of Dec. 15, according to news reports.
Black Knight Financial Services says in a report that “the changes to the capital gains exemption could impact approximately 750,000 home sellers per year under existing home sales volumes.”
5. Mortgage interest deduction for second homes
Under current law, you may deduct the interest you pay on mortgage debt up to $1 million ($500,000 if married filing separately) on your primary home and a second home. As of Dec. 15, it was unclear how the compromise bill treats mortgage interest for second homes.
6. Moving expenses
Under current tax law, you may deduct some moving expenses when you move for a new job. You have to meet complex criteria involving distance and timing of the move.
Under the House and Senate bills, only members of the armed forces would be allowed to deduct moving expenses. As of Dec. 15, it was unclear whether this measure remained unchanged.
Fewer taxpayers would itemize
The nonpartisan Tax Policy Center estimates that the number of itemizers would fall from about 49 million to 10 million.
The upshot: Under current law, if you’re married filing jointly, and you paid $15,000 in mortgage interest and property taxes in 2017, you would itemize those deductions because they exceed the standard deduction of $12,700.
But if tax reform raises the standard deduction for married filing jointly to around $24,000 in 2018, then that $15,000 in mortgage interest and property taxes is less than the standard deduction. So you wouldn’t itemize. You would use the standard deduction.
Whether you end up paying less tax or more tax depends on a wide range of factors beyond the homeownership-related deductions and exclusions discussed here. Every taxpayer is different.
Realtors raise a ruckus
The National Association of Realtors opposes increasing the standard deduction on the grounds that it “would destroy or at least cripple the incentive value of the mortgage interest deduction (MID) for the great majority of current and prospective homebuyers, and sap the incentive value of the property tax deduction for millions more.”
NAR argues that the de-emphasis on itemized deductions would result in “a plunge in home values across America in excess of 10%, and likely more in higher cost areas.”
Skeptics challenge the Realtors’ assertion that giving taxpayers a bigger standard deduction would cause home prices to nosedive. Logan Mohtashami, senior loan officer for AMC Lending Group in Irvine, California, says in an interview that there are always “spreadsheet people” who decide whether to rent or buy a home based on tax advantages. “But, in general, people buy homes because they want to raise their family, they want to own something, forced savings” — and not having to deal with a landlord, he says.
The article 6 Ways Tax Plan Could Change Homeownership originally appeared on NerdWallet.