By Paul Staples, CPA, Tax Supervisor
The recent passage and signing of the 2017 Tax Cuts and Jobs Act has resulted in many changes for taxpayers across the country. One area of importance to many individuals and families is the tax benefits of home ownership. Let’s take a look at a few of these major provisions and see how they were impacted by the new tax legislation.
Please note that each taxpayer’s situation is unique and you should speak with your tax advisor before making any decisions.
1. Property Tax Deduction
Prior to the 2017 Tax Cuts and Jobs Act (“TCJA”), taxpayers were allowed an itemized deduction for either state, local, and foreign income, real estate, and personal property taxes or state and local general sales tax. There was no specific limit on the itemized deduction for taxes paid, but rather a limit on total itemized deductions based on adjusted gross income.
Under the TCJA, for tax years beginning after December 31, 2017, and prior to January 1, 2026, the combined deduction for state and local income, property, and real estate taxes is limited to $10,000 ($5,000 for married filing separately) for any one tax year. Please note that the $10,000 (or $5,000) limits are not indexed for inflation. Additionally, foreign real property taxes are no longer eligible for deduction on an individual’s tax return.
It should be noted that a deduction is still allowed for real estate, personal property, and certain other taxes incurred while carrying on a trade or business (including rental properties). These taxes will generally be claimed on Schedules C and E of Form 1040.
2. Mortgage Interest Deduction Limitation
Prior to the TCJA, taxpayers were allowed an itemized deduction for mortgage interest paid or accrued on acquisition indebtedness secured by a qualified residence (considered a first or second home). The limitation on acquisition indebtedness was capped at $1 million ($500,000 if married filing separately).
Homeowners were also allowed a deduction for the interest on a home equity line (up to $100,000 or $50,000 if married filing separately) secured by a qualified residence, regardless of how the proceeds were used.
For tax years beginning after December 31, 2017 and prior to January 1, 2026, the TCJA has modified certain provisions. Mortgage acquisition debt is limited to $750,000 ($375,000 if married filing separately) for debt incurred on or after December 16, 2017 (see clarification that follows). Please note that the $750,000 debt limit is not indexed for inflation. Additionally, the deduction for home equity interest has been eliminated. This includes home equity indebtedness already incurred prior to January 1, 2018. Please note that home equity indebtedness relates to a loan used for any purpose other than acquiring, building or substantially improving your residence. If you have a home equity loan that is used to acquire, build or substantially improve the residence – that is still deductible subject to the overall limitation of $750,000 of total debt. A home equity loan used to acquire, build or substantially improve the residence is referred to as “acquisition indebtedness” even if it is used for home improvement after the initial acquisition. If you have a home equity loan that is for mixed purposes, you will need to allocate the interest such that you only deduct interest related to the portion of the loan used to acquire, build or substantially improve the residence (the “acquisition indebtedness” portion of the loan).
For all acquisition debt incurred on or before December 15, 2017, the $1 million limitation on indebtedness will remain in effect. The new legislation further clarifies that as long as a binding written contract is entered into on or before December 15, 2017 to close on the purchase prior to January 1, 2018, and the taxpayer purchases that residence prior to April 1, 2018, the $1 million limitation will be applied with respect to the mortgage interest deduction. Assuming the original purchase occurred on or before December 15, 2017, The TCJA does retain the $1 million debt limitation for any future refinancing occurring prior to the expiration of the original loan term as long as the refinanced debt is no greater than the original debt.
In applying the $750,000 ($375,000) debt limit noted above to any debt incurred after December 15, 2017, the $750,000 ($375,000) limit must be reduced (but not below zero) by the amount of debt incurred on or before December 31, 2017 that is treated as acquisition debt for purposes of the home mortgage interest deduction.
For tax years after December 31, 2025, the acquisition debt limit raises to $1,000,000 ($500,000 if married filing separately) and is applied to the taxpayer’s aggregate amount of acquisition debt, without regard to when the debt was incurred. Finally, it should be noted that the definition of a qualified residence did not change under the TCJA.
3. Retention of Exclusion of Gain on Sale of Your Home
Though previous versions of the bill had some changes to the gain exclusion, the final TCJA did not make any changes to the legislation surrounding exclusion of gain on the sale of your home. IRC Code Section 121 allows you to exclude the first $250,000 ($500,000 if married filing joint) of gain on the sale of your principal residence. The residence must be considered your main home for a period totaling two years out of the five years prior to the date of sale.
4. Moving Expenses
Through December 31, 2017, taxpayers were allowed an above-the-line deduction for moving expenses incurred during the tax year – assuming the move was related to a change in principal place of work and certain distance requirements were met. Alternatively, employers could exclude moving expense reimbursement from wages. Moving expenses eligible for the deduction or wage exclusion included: (1) Moving your household goods and personal effects (including in-transit or foreign-move storage expenses), and (2) Traveling (including lodging but not meals) to your new home.
The TCJA suspends the moving expense deduction for tax years beginning after December 31, 2017 and before January 1, 2026. The deduction is kept for members of the Armed Forces on active duty.
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.