Homeowners- Don’t panic yet over Senate tax overhaul

Homeowners- Don’t panic yet over Senate tax overhaul

Kenneth R. Harney on Nov 17, 2017

WASHINGTON – If you hoped that Senate Republicans would treat homeowners and buyers more kindly in their tax overhaul plans than their colleagues did in the House, you were an optimist. It didn’t happen.

In fact, the Senate tax bill released last week is harsher on residential real estate in some areas than the House version, with two notable exceptions- Senate tax writers retained the current $1 million ceiling on home mortgage amounts that are eligible for interest deductions. The House bill seeks to cut that in half to $500,000. But the Senate’s seeming concession has limited value, given that only a small fraction of homeowners in the U.S. have mortgages of $500,000 to $1 million. Also, the Senate bill leaves intact mortgage-interest deductions on second homes; the House bill would eliminate them.

Here’s a quick look at some key punitive details in the Senate bill’s fine print that haven’t gotten much attention but could be important to you-

- Home equity loans. Under current law, you can borrow up to $100,000 in “home equity indebtedness” and write off the interest on that amount. Home equity loans have become enormously popular in recent years – especially in the form of lines of credit (HELOCs) – as owners’ equity holdings have soared to record levels. In the first quarter of 2017 alone, according to ATTOM Data Solutions, 227,000 new HELOCs worth $43.4 billion were originated around the country. HELOCs are hot.

Among the traditional attractions of HELOCs and other forms of home equity loans has been their flexibility. You can use the money you pull from your equity for whatever you like. That would change drastically under the Senate Republicans’ bill. It would erase the entire category known as “home equity indebtedness” from the tax code, pulling the rug out from under the booming HELOC market. Though the bill doesn’t get into operational details, homeowners with existing first mortgages might still be able to borrow against their equity, but they could be restricted to using the money for improvements to their principal residence.

- SALT. Deductions of state and local property taxes, sales taxes and income taxes – the so-called SALT write-offs that are heavily used by homeowners – take a heavy hit under the Senate bill. The House Republicans’ bill would limit SALT deductions to $10,000 in property taxes. Currently there is no dollar limit, and income and sales taxes can be included. The Senate bill would kill the deduction outright. For owners in high-tax markets such as Washington D.C., Maryland, Virginia, California, New Jersey, New York, the New England states plus Illinois and Ohio, the Senate’s total wipeout of the deduction could raise their federal tax bills starting next Jan 1.

- Tax-free gains. The Senate bill would also make a major change in one of the most valuable current tax benefits for homeowners – the ability to pocket capital gains on home sales free of federal taxation. Under the current tax code, home sellers filing jointly can “exclude” up to $500,000 of gains from a sale (up to $250,000 for single filers) tax-free, provided they have lived in and used the property as their principal residence for an aggregate two years out of the preceding five years. That’s a big deal for many sellers, especially seniors who expect to depend on the cash raised from their sale to supplement their incomes during their retirement years.

Like the House bill, the Senate version rejiggers the tax-free formula in order to slash the number of sellers eligible to use this benefit. To qualify, sellers would have to live in their homes for five out of the preceding eight years, and could only use the tax-free provision once every five years. That’s likely to create problems for young families who move from their first home within the first five years and people who are transferred or move to new jobs more quickly than they had originally planned.

What’s next? The two bills must survive upcoming floor debates, which could be dicey given that both measures gush red ink, add to the deficit and have generated strong opposition for handing too many costly breaks to corporations and wealthy taxpayers. Republicans in both houses will need every vote they can muster.

Bottom line- The changes the bills propose to make in home real estate rules are drastic, but they are no sure thing. Don’t panic quite yet – this game is just getting started.

Hidden costs for homeowners in latest tax bill

Hidden costs for homeowners in latest tax bill

Kenneth R. Harney on Nov 10, 2017

WASHINGTON – The message sent by Republicans in the tax overhaul bill they launched last week is unmistakable and blunt- We think homeowners and buyers have gotten much too sweet a deal from the federal tax code for far too long – and now we’re going to whack them down. No other major sector of the economy gets hit so hard in the proposal in so many places as homeownership.

You’ve probably heard about the splashiest cut proposed in the bill- a reduction in the maximum deductible mortgage amount from $1 million to $500,000. And you might have figured, “Eh, no big deal, my mortgage is nowhere near that size.” But you might have missed some of the other less publicized, but punitive, changes tucked away in the legislative text that just might bite you, now or in the future.

For example, Section 1402 of the proposal would significantly alter the ground rules governing a benefit that millions of homeowners have factored into their financial planning for decades. Under current law, you can exclude from taxation the first $250,000 of capital gains on a sale as a single filer ($500,000 filing jointly) provided you have used the house as your principal residence for an aggregate two years out of the five years preceding the sale. Plus, you can use the exclusion as frequently as once every two years.

Under the Republican proposal, the two-out-of-five standard would vanish. Instead you’d need to live in and use the property as your main residence for five of the preceding eight years – a requirement designed to lower the number of people eligible to claim the exclusion. This would inevitably hurt middle income and other families who were forced to sell their houses because of job transfers or medical reasons, as well as first-time buyers moving up to a new home a few years after purchase as their families expand. The bill also would limit use of the tax-free exclusion to once every five years, up from the current two years.

Another noteworthy change that’s easy to miss- Section 1302 of the bill, which would slice the mortgage-interest deduction in half, includes a single sentence that could be important to many Americans who own second homes. It says simply that taxpayers can have only one “qualified residence.” With that brief redefinition, the bill would eliminate thousands of homeowners’ ability to write off mortgage interest on second homes and weekend getaway houses. Removing the deduction would increase the cost of ownership on potentially millions of second homes. According to a study last year by the National Association of Home Builders, 7.5 million second homes qualified for the mortgage interest deduction, based on the latest available Census Bureau survey data.

Then there’s the whole issue of when the housing changes proposed in the bill would take effect. Traditionally major tax bills contain “transition” periods to give affected taxpayers time to adjust. That could happen with this bill as well, but at the moment, the starting dates included for housing provisions are shocking. Check out these effective dates as they currently stand in the bill-

- The reduction in the mortgage-interest deduction ceiling, plus deductions for second homes, would take effect on loans taken out after Nov. 2. Not only is there no transition time, the changes are essentially retroactive. This could negatively impact shopping, sales – even prices – on homes closed after Nov. 2.

- The capital-gains exclusion changes would cover home sales after Dec. 31. No grandfathering, no wiggle room.

- The capping of deductions for state and local taxes to $10,000 – currently there is no limit for taxpayers who itemize – would start for everybody after Dec. 31. Note that only property taxes could qualify for even this limit – sales and income taxes would no longer be deductible.

- Expenses related to moving from one home to another no longer would be deductible after Dec. 31.

You might be wondering- Could all this nasty targeting of homeownership actually make it through Congress and get signed into law? Certainly the major real estate lobbies – the National Association of Home Builders and the National Association of Realtors – plan campaigns to block the housing changes as the bill moves through the House and the Senate unveils its version.

But keep this in mind- The Republicans are desperate to pass a “tax cut” bill by year’s end. There are plenty of obstacles in their way – even from within their own ranks. But it could happen.