The Tax Cuts and Jobs Act (“TCJA”) signed into law by President Trump, was the largest overhaul of the U.S. Tax Code since 1986. These changes impacted almost all aspects of American life including home ownership. Over the next few posts we will detail what has stayed the same and what has changed.
Exclusion for Sale of Principal Residence and Deduction of Mortgage Interest.
To begin with, the TCJA retains the exclusion of gain on a sale of a principal residence. This allows taxpayers to exclude the first $250,000 ($500,000 if married filing jointly) from the sale of a principal residence so long as eligibility requirements are met. Both the original House and Senate would have changed this.
Further, the TCJA still allows deductions for mortgage interest, but the final bill reduces the limit on deductible mortgage debt to $750,000 for new loans taken out after December 14, 2017. Also, homeowners that refinance mortgage debt after 12/14/17 up to $1million can still deduct mortgage interest so long as the new loan does not exceed the loan being refinanced.
The TCJA also repeals the allowance for a deduction of interest paid on home equity debt through 12/31/25; however, the deduction is still allowed if the loan proceeds are used to substantially improve the home itself. In other words, interest on home equity loans to finance the purchase of cars, education, etc. is no longer deductible.
For second homes, interest remains deductible subject to the $1million/$750,000 limits set forth above.
These and other changes to the U.S. Tax Code have significant implications on numerous everyday legal issues our clients encounter, including real estate transactions, probate, estate planning, divorce and business planning.
Our next blog post will address the deduction for State and Local Taxes, Standard Deduction and Personal Exemptions. Contact Painter & Associates to help you navigate the TCJA.