When I wrote last quarter’s newsletter articles, the fate of the tax code changes was still up in the air. One of the most dramatic anticipated changes would have made the time period that the owner of a principal residence needed to own and occupy the property to take advantage of the full capital gains exemption of $250,000 for single filers and $500,000 for married couples 5 out of the past 8 years instead of the current 2 out of 5 years. Fortunately, that provision was removed in the final bill, despite being in the original bills passed by both the House and Senate. The fact that provision was left unchanged should be greeted with a big sigh of relief by homeowners.
Other changes in the tax code going forward are notable though. Any new mortgages taken out beginning 12/14/2017 will only have interest be deductible up to a loan amount of $750,000 instead of the previous $1,000,000 limit. The House bill originally intended to reduce that amount to $500,000, so fortunately, that was also different in the final bill. However, all mortgages taken out before 12/14/17 still qualify for the interest deduction up to $1,000,000 and if you refinance an existing mortgage taken out before that date, that mortgage would also qualify for the $1,000,000 limit, provided the refinanced mortgage doesn’t exceed the amount of the mortgage being refinanced. Second homes also still qualify for the mortgage interest deduction, but with the total limited to the amounts specified above, also a change from what was originally in the House bill, which would have eliminated this deduction completely. Interest on Home Equity lines up to $100,000 may still be tax deductible, but only for the purchase or substantial improvement of a principal residence.
Property taxes for homeowner’s principal residences, along with State Income Taxes are only deductible to a total of $10,000 going forward. Obviously, that change affects our area considerably more than much of the rest of the country with our higher real estate values and taxes. However, some other changes in the tax code should mitigate those items somewhat. Many taxpayers with reasonably high incomes who ended up with considerably higher State & Property Taxes than the $10,000 limit in California also were typically affected by the Alternative Minimum Tax in the past, which negated or reduced those deductions. The new tax code also raises the threshold quite a bit for being affected by the AMT, so it will be an issue for far fewer taxpayers. That change in the AMT, along with the lower overall tax rates, should end up being a good counterbalance for the loss of those deductions, but it will vary greatly depending on the individual situation of the taxpayer.
DISCLAIMER—I am not a CPA or tax professional. For advice relating to your personal tax situation, you should consult a CPA or tax advisor before making any decisions or taking any action.