The Tax Reform Bills: Home Ownership, Purchases & Sales
California Bar Certified Specialist in Tax Law
by Michael Hackman
Congressional efforts to enact tax reform are now in the home stretch. While there is no assurance that any legislation will be enacted, or what the form of a final bill would look like, it is likely that something will pass and be signed by the President. And it is almost certain that some of the basic rules with respect to taxation of home ownership will change.
Through the years, the Government has tried to use tax policy to encourage home ownership. First time buyers would weigh the deductible costs of owning a home with the costs of non-deductible rent. That all may change.
The Administration is dead set on reducing taxes on corporations and owners of pass through entities to 20 percent or something very close to it, and among other things is financing those reductions with reduction or elimination of most itemized personal deductions.
Changes with Respect to the Home You Own
Currently, homeowners can deduct their property tax. The House bill would allow a deduction for property taxes, but only up to $10,000. The proposed legislation in the Senate would eliminate deductions for all state and local taxes, including property taxes.
There would be no new limitations on deductions for existing home mortgage interest (presently limited to interest on $1 million of mortgage indebtedness plus another $100,000 of home equity indebtedness). However, under the Senate legislation, the category of home equity indebtedness would be eliminated.
If You Want to Purchase a Home
The limitations discussed above on property taxes would be in effect. For example, if you purchase a California home for about $800,000 you would have property taxes above $10,000 and could not deduct the excess (this assumes that there is no exemption you can qualify for).
If the House bill passes, you could only deduct interest on a loan of $500,000 to assist you in purchasing the home. The present Senate discussions would maintain the $1 million limit.
If You Want to Sell Your House
Because of the limits discussed above, your pool of buyers may be substantially reduced. The number of interested buyers would be necessarily reduced by of the deduction limits.
The ability to avoid some tax on a home sale would be substantially curtailed. In addition, under present law the first $250,000 ($500,000 for most married taxpayers) of the gain on sale of a home was not taxed, so long as you had lived in and owned the home for two years (out of the last five). The House bill and the legislation in the Senate would increase that to five years (out of the last eight).
Taxes on sales of houses would remain subject to capital gains taxes. The 3.8 percent “Obamacare” tax on certain investment income would also apply. The 3.8 percent tax would have been eliminated (though not necessarily immediately) in the proposed healthcare legislation, but those proposals did not pass.
This legislation may not pass before year-end. But the Trump administration is pining for a significant legislative victory and should continue to pursue tax changes next year, and home ownership will again be a convenient target.
Michael Hackman is the Chair of both our Tax, and Trust & Estate Planning Practice Groups.