Tax Reform And What It Means For Homeowners

With the 2018 Tax Reform, there are three changes that are particularly relevant for homeowners:a reduction in the amount of mortgage interest that can be deducted, a new cap on property tax deductions and limits to the capital gains exemption used by homeowners when they sell.

As the law stands now, homeowners can claim (as an itemized deduction) interest paid on mortgages valued up to $1.1 million used to acquire or improve a first and/or second home. The plan maintains the current cap for existing homeowners, but slashes it to $500,000 for homes purchased in the future. (The bill would also limit the mortgage interest deduction to one principal home, ending any deductions for vacation homes.) This means a home buyer paying 4% interest on a $1 million mortgage would be able to deduct just $20,000, as opposed to the current $40,000. At the same time as the plan cuts back on deductions for individual homeowners, it exempts real estate investors from a new 30% limit on interest deductibility for businesses.

Another change is to the provision that allows homeowners to exclude from their taxable income up to $250,000 in capital gains ($500,000 for married taxpayers) from a sale of their primary residence. Under the plan, to qualify for this break, homeowners must have owned and lived in the home for at least five of the last eight years. Currently the rule is two of the last five. Taxpayer use of the exclusion would also be limited to one sale every five years, rather than one every two. In addition, under the house bill, you begin to lose the gains exemption if adjusted gross income (in a look-back period) exceeds $500,000 if married or $250,000 if single.

*Courtesy of, Contact your tax consultant for more information.