Recent tax code changes could potentially affect the financial aspects of buying and owning a home. Several of the revisions impact areas like mortgage interest deductions and home equity loan deductions. To help clarify the updates, we’ve created a chart that shows the changes.
Exclusion of Gain on the Sale of a Primary Residence
Under the original proposed changes, homeowners would be required to live in a home for a minimum of five out of eight years to claim the capital gains exemption. It was decided however, that the current tax framework would remain the same: a homeowner who had lived in a home for a minimum of two of the previous five years wouldn’t pay anything in capital gain taxes if they sold their home.
How It Could Affect You: There are no major changes. The two of previous five years requirement will stay unchanged.
Mortgage Interest Deduction (MID)
Under the initial proposal, the limit on the mortgage interest deduction (MID) would be reduced from $1,000,000 to $750,000.
How It Could Affect You: This proposal reduces the limit on deductible mortgage debt to $750,000 for new loans taken out later than December 14, 2017. Assuming a 20% down payment, reduction in the MID will only impact buyers who are purchasing a home in the price range between $938,000 and $1,250,000. Experts have mixed reactions, with some feeling that it will have little impact on the market and others feeling it could be potentially detrimental having a limit on the MID raising taxes for those who itemize.
State and Local Taxes (SALT)
The original proposal includes the elimination of the state and local tax deduction (including property taxes). Under the new tax code, itemized deductions of up to $10,000 for state and local property taxes and income or sales taxes.
How It Could Affect You: Experts agree that higher taxed regions will be primarily impacted, as those homeowners now have a cap on these deductions. Some people might choose to live in one state over another because of taxation. This could impact demand on housing in some states.
What Does It Mean for Buyers?
Many families consider homeownership an essential part of the American Dream, and don’t necessarily purchase a home simply for the tax advantages. So even with the tax code changes, the main reasons people purchase homes (stability, freedom, building equity) are unlikely to be affected. If you are considering purchasing a home, speak with your Homestead Funding Loan Originator to review how the new code will impact you.