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.
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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.
Kenneth Harney is executive director of the National Real Estate Development Center.