The examples provided are for illustrative purposes and based on a preliminary reading of the final legislation as of December 20, 2017. Individuals should consult a tax professional about their own personal situation.
All individual provisions are generally effective after December 31, 2017 for the 2018 tax filing year and expire on December 31, 2025 unless otherwise noted. The provisions do not affect tax filings for 2017 unless noted.
Exclusion of Gain on Sale of a Principal Residence
- The final bill retains current law. A significant victory in the final bill that NAR achieved.
- The Senate-passed bill 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 past 5 years to 5 out of the past 8 years. The House bill would have made this same change as well as phased out the exclusion for taxpayers with incomes above $250,000 single/$500,000 married.
Mortgage Interest Deduction
- The final bill reduces the limit on deductible mortgage debt to $750,000 for new loans taken out after 12/14/17. Current loans of up to $1 million are grandfathered and are not subject to the new $750,000 cap. Neither limit is indexed for inflation.
- Homeowners may refinance mortgage debts existing on 12/14/17 up to $1 million and still deduct the interest, so long as the new loan does not exceed the amount of the mortgage being refinanced.
- The final bill repeals the deduction for interest paid on home equity debt through 12/31/25. Interest is still deductible on home equity loans (or second mortgages) if the proceeds are used to substantially improve the residence.
- Interest remains deductible on second homes, but subject to the $1 million / $750,000 limits.
- The House-passed bill would have capped the mortgage interest limit at $500,000 and eliminated the deduction for second homes.
Deduction for State and Local Taxes
- The final bill allows an itemized deduction of up to $10,000 for the total of state and local property taxes and income or sales taxes. This $10,000 limit applies for both single and married filers and is not indexed for inflation.
- The final bill also specifically precludes the deduction of 2018 state and local income taxes prepaid in 2017.
- When House and Senate bills were first introduced, the deduction for state and local taxes would have been completely eliminated. The House and Senate passed bills would have allowed property taxes to be deducted up to $10,000. The final bill, while less beneficial than current law, represents a significant improvement over the original proposals.
Repeal of Personal Exemptions
- Under the prior law, tax filers could deduct $4,150 in 2018 for the filer and his or her spouse, if any, and for each dependent. These exemptions have been repealed in the new law.
- This change alone greatly mitigates (and in some cases entirely eliminates) the positive aspects of the higher standard deduction.
To illustrate how the above-listed changes can affect the tax incentives of owning a home for a first-time buyer and a middle-income family of five, please see these examples:
Example 2: Middle-Income Family of Five
Mortgage Credit Certificates (MCCs)
- The final bill retains current law.
- The House-passed legislation would have repealed MCCs.
Moving Expenses
- The final bill repeals moving expense deduction and exclusion, except for members of the Armed Forces.
- The House-introduced bill would have eliminated the moving expense deduction for all filers, including military.
For more information, contact your local CPA specializing in real estate tax. Need recommendations? Give us a call!
Source: National Association of Realtors
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