The tax bill signed into law in December 2017 has some important provisions for taxpayers who own real estate (or who hope to purchase real estate) in 2018. Below are some highlights of the new law. As always, consult your tax advisor to see how the new law might affect your particular situation.
Exclusion of Gain on Sale of a Principal Residence
- The law retains current law (single filers can exclude up to $250,000 of gain and married filers can exclude up to $500,000 of gain).
- 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 law 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 law repeals the deduction for interest paid on home equity debt through 12/31/25 (previously homeowners could deduct interest on home equity debt up to $100,000 with no restrictions on how the money used – like for college tuition). Interest is still deductible on home equity loans (or second mortgages) if the proceeds are used to substantially improve the residence.
- Interest on mortgage debt 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 law allows an itemized deduction of up to $10,000 for the total of state and local property taxes and income and sales taxes. This $10,000 limit applies for both single and married filers and is not indexed for inflation.
- 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.
Moving Expenses
- The law repeals the 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.
Standard Deduction
- The law provides a standard deduction of $12,000 for single taxpayers and $24,000 for joint returns. The new standard deduction is indexed for inflation.
- By doubling the standard deduction, Congress has greatly reduced the value of the mortgage interest and property tax deductions as tax incentives for homeownership. Congressional estimates indicate that only 5-8% of filers will now be eligible to claim these deductions by itemizing, meaning there will be no tax differential between renting and owning for a majority of taxpayers.
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.