When we think about taxes issues related to being a homeowner, we usually think of three areas; property taxes, the mortgage interest deduction, and the capital gains tax that comes with selling your home. Right now, with the House and Senate working on a tax overhaul, how will you be affected?
Property taxes – no change here
You currently get to itemize the first $10,000 that you paid in local property taxes on your federal income taxes. For the average family home, you probably never ran up against the upper limit. As a matter of fact, in most states only 3% of homeowners ever exceeded the $10,000 limit. Think big expensive homes and expensive costal states. The tax overhaul bills passed in the House and Senate maintain the same $10,000 limit.
Mortgage interest deduction – only a potential issue if you own an expensive home
Here we see differences between the House and Senate bills. In the House version, families can only itemize the first $500,000 in mortgage interest while the Senate version retains the current $1,000,000 limit. We will have to see how the upper limit changes after the House and Senate complete their negotiations on the final version of the law. However, it’s safe to say that the average homeowner will still be able to itemize the full amount of their mortgage interest.
Capital gains tax – you be the judge
Currently, when you have a capital gain (a profit from the sale of your property) on the sale of your home, you don’t have to pay taxes on any gain under $250,000 for an individual or $500,000 for a family…as long as you have lived in that home for 2 of the 5 previous years. Both the House and Senate versions of the tax overhaul bill would change the time requirement for living in your home to 5 years. With the change, if you’ve lived in your home less than 5 years and sell it, you will have to pay taxes on the capital gains that come from the sale.
What will be the impact of the change in the capital gains tax? In a recent study, the National Association of Realtors (NAR) reported that approximately 25% of home sales occur before the homeowner has been in the home for 5 years. This is likely to change. More homeowners will probably stay in their homes the full 5 years to avoid paying the tax. Have you lived in your home for less than 5 years? Under the new tax bill, you probably won’t want to accept that job offer that requires you to sell your home and relocate, unless the job comes with a very big raise.
So, what’s the bottom line?
Unless you own an expensive home or plan on moving before you’ve been in your home for at least 5 years, and you itemize your deductions, you probably won’t see any changes in taxes related to homeownership. That’s great news for most of us. What about your income taxes? Well, that’s another story entirely.