There’s still a big push to get the tax reform bill passed before the end of the year. If it does go into law, homebuyers will encounter 3 big changes to tax incentives that they have long enjoyed. Here’s a quick summary of how the 2017 tax reform will affect MA homebuyers.
Capital Gains Exemption on Sales of Primary Residences
Currently, if you have lived in your home (as a primary residence) for 2 out of the last 5 years, you are exempt from paying taxes on gain from the sale of that home. For single taxpayers, the exemption amount is $250,000. For married taxpayers, the exemption is for $500,000. Exemption amounts are based on profits from the sale and not the sale price. By requiring only 2 years residency, this law encourages more homeowners to sell their existing homes and purchase new homes, either as an upgrade or downsize.
Under the new law, homeowners will need to reside in their homes for 5 out of the last 8 years. Selling before that 5 year mark will result in capital gains taxes (typically 15% to 20%) on all sale profits. Given that most homeowners rely on the proceeds from their sale to purchase a new home, this law would likely result in fewer home listings in an already starved market. This one change, alone, in the 2017 tax reform could have huge implications on the Massachusetts market.
Update: This provision was removed from the final bill.
Reduction in Property Tax Deductions
Another important element of the 2017 tax reform proposal involves property taxes. Currently, homeowners may use their property taxes as an itemized deduction. The new law would cap the deductible amount at $10,000. Fortunately, taxes for the average single family home in Massachusetts are below that amount. However, higher priced properties, multi-unit properties, or those with more land will be most impacted by this change.
Update: This is indeed included in the final bill. To make matters worse, the cap applies to all state and local taxes, not just property taxes.
Limits on Mortgage Interest Deductions
The 3rd 2017 tax reform item that directly affects homeowners involves mortgage interest deductions. Massachusetts residents heavily rely on this deduction as a major benefit to homeownership. The proposed change would limit the amount of interest that may be deducted. Under the new law, only interest for $500,000 of a mortgage balance would be deductible.
Although the average price of homes statewide falls below that mark, most homes in Eastern Massachusetts and Greater Boston far exceed it. This change will therefore have a pretty big impact on Massachusetts residents.
Update: This is included in the final bill, but with a higher limit of $750,000.
What You Should Know
If you currently own a home or are planning to buy one, keep an eye on the media coverage over the next few weeks. Should the 2017 tax reform plan pass, your homeownership tax benefits could change as a result. If you own a home and are planning to sell, the possible capital gains taxes will directly impact your bottom line. You should include this in your financial estimates before selling and buying.