How the tax plan could change homeownership

The House and Senate have agreed on a compromise tax plan that would change, among other things, whether and how homeowners deduct mortgage interest and property taxes.

Here are six elements of the tax plan that could affect home ownership, home selling and moving.

1. Mortgage interest deduction

The mortgage interest tax deduction is touted as a way to make homeownership more affordable. It cuts the federal income tax that qualifying homeowners pay by reducing their taxable income by the amount of mortgage interest they pay. Under the compromise bill, the deduction is scaled back to interest on debt up to $750,000, instead of $1 million, for people who buy homes after Dec. 15, 2017.

The bill carves out an exception for people who were under contract to buy a home before Dec. 15, 2017, as long as they were scheduled to close by Jan. 1, 2018.

Another exception: When you refinance a mortgage, the compromise bill treats the new loan as if it were originated on the old loan’s date. That means the old limit of $1 million would still apply.

2. Property tax deduction

The current tax law eases the pain of paying property taxes by allowing qualifying taxpayers to reduce their taxable income by the total amount of property taxes they pay. In the compromise bill, the deduction would be limited to a total of $10,000 for the cost of property taxes and state and local income taxes.

3. Home equity deduction

On top of the mortgage interest deduction, current tax law adds a deduction for interest paid on home equity debt “for reasons other than to buy, build or substantially improve your home.” So, for example, if you borrow from a home equity line of credit to pay tuition, the interest you pay is tax-deductible.

The compromise bill eliminates the deduction for interest paid on home equity debt.

4. Capital gain exclusion

When you sell a house, the capital gain is the difference between the price you paid for it and the price you sold it for. This capital gain is treated as taxable income. If you have owned the house long enough, you’re allowed to exclude up to $500,000 of this capital gain as income so you don’t have to pay federal income tax on it. (The exclusion is capped at $250,000 for single individuals and married taxpayers filing separately.)

The compromise bill doesn’t alter the capital gain exclusion for homes. The House and Senate had voted to limit the exclusion, but they struck that language from the final bill.

5. Mortgage interest deduction for second homes

Under current law, you may deduct interest on mortgage debt on your primary home and a second home. The compromise bill kept this part of the tax law in place, although it reduced the amount of eligible mortgage debt, as seen in item No. 1 above.

6. Moving expenses

Under current tax law, you may deduct some moving expenses when you move for a new job. You have to meet criteria involving distance and timing of the move.

Under the compromise bill, only members of the armed forces on active duty would be allowed to deduct moving expenses.

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