The Affects Of The New Tax Bill
Unless you have stayed offline and haven’t spoken to a single person over the last month, then you know about the proposed tax bills that we are all concerned about. Many have started calling their congresspersons to encourage a vote against the proposed bills out of fear of losing key deductions on their tax returns. We encourage folks to speak their minds to their congresspersons, regardless of how you feel about it. What we want to do today is to simplify the language and explain how these changes affect you so that you can make a more informed decision.
When Will It Go Into Effect?
If passed, the tax bill will go into effect on January 1 of next year. That’s just a couple of weeks away! Despite it being so close, you won’t feel the affect until April of 2019 when you are filing your tax returns. Your tax returns that you file in the coming April will reflect current tax deductions. Fortunately, it gives us a bit of time to dive into whether or not this bill will be good for American citizens. Unfortunately, it doesn’t mean that we can change it soon enough. The House is supposed to vote on the bill the week of Dec 18th but it is not clear if that will truly be when they vote. It’s been rumored that Dec 22nd is the deadline for the vote. We suspect they will put it off as long as possible as they listen to constituents who have been hitting the telephone and fax lines in droves.
What Happens To The Homeowner?
Since nothing has been passed by the House yet, this is where things can get a bit muddy. Under the House bill you would be capped on new mortgages up to $500,000 and the deduction can only be on your primary residence. You would also still be able to deduct state and local property taxes but you would be capped at $10,000. Under the Senate bill, the mortgage deduction would still be in place and capped at one million but the equity debt (re-financing not related to home repairs) would not be deductible and all property tax deductions would be eliminated. The argument is that with a higher mortgage deduction, the property tax deductions would not be needed.
So there are a few issues with the above. If you can only take deductions on your primary residence, this will hurt those individuals who have more than one home (such as a vacation home). A cap on property taxes at $10,000 can certainly be a struggle for people who live in a high percentage area that have to pay multiple property taxes on the primary residence. The Senate bill isn’t much better with a removal of the equity debt deduction. Their removal of property tax deductions sound good on paper, it has a profound effect on the real estate market.
If you are planning on selling your home, both bills will also effect your ability to exclude the capital gains. Currently, you can exclude $250,000 of capital gains provided that you have lived in the home two out of the past five years. Under House and Senate bills, you will only be able to exclude the same amount if you have lived in the home one year out of the past eight years. This is a big hit to folks who may find a real need to move before eight years has passed and not get hit with taxes on capital gains.
What Happens To The Market?
Many people associate their capital gains exclusions when selling and their property and mortgage deductions when buying. With the possible passing of one of these new bills, people are going to be hesitant to buy or sell. The National Association of Realtors is predicting that if either bill goes into effect, housing prices will drop. Sounds good if you are buying, right? Sure, until you see that you have less deductions on your tax return. Don’t forget that some people will be selling a home while buying and if they don’t fall into that eight year time span, they could find themselves with a very large capital gain tax.
We hope that we see improvements in the discussion of any changes to the tax bill, or come to the conclusion that there should not be any changes at all. When you are looking to buying or selling your home, freely speak with your realtor and tax accountant about how to handle potential changes so that you can be most prepared!