What the House Proposal Will Mean to Homeowners

By Michelle J. Lane, Realtor

By now, you have heard a lot about the House tax reform proposal (HR.1) and may be wondering how it will impact you as a homeowner and what the real estate industry is doing to protect your interests.  At a high level, those changes are:

  • Mortgage Interest Deduction is capped at a loan balance of $500,000.
  • Real estate tax deduction is capped at $10,000.
  • Tenure for Capital Gains deduction moves up from 2 of the last 5 years to 5 of the last 8.
  • Eliminates the Moving Deduction

How will this impact homeowners in the greater Boston area?

Cap on Mortgage Interest Deduction

Currently, the mortgage interest deduction is capped at a loan balance of $1,100,000. Under the House proposal, the cap would fall to $500,000.  The change applies to future impact future home buyers as the proposal maintains the cap of $1,100,000 on existing homeowners.  This will impact a great percentage of Massachusetts homeowners, particularly those in and around Boston. To make matters worse, the $500,000 cap is not indexed to inflation or home price growth, so over time, more homebuyers will be pushed into this category.  The plan would also limit the mortgage interest deduction to one principal home, ending any deductions for vacation homes.  It also will not allow you to deduct the interest on a home equity line.

Cap on Real Estate Tax Deduction

As drafted, real estate tax deductions are capped at $10,000 and that figure also is not indexed to allow for growing home values or tax rates over time.

Capital Gain Tenure

Currently, to claim the exclusion from capital gains, you must have lived in your house for 2 of the last 5 years.  This has been important to people who rent out their homes during a relocation for example. Under the House plan, a home seller will now have to have lived in the home for 5 of the last 8 years to claim the exclusion from capital gains. This will impact any home owner who sells in less than 5 years after buying their home. Roughly 20% of homeowners sell in 5 years or less due to divorce, relocation, or upsizing their home.  Imagine how this would impact those in the military.

This change would force people to hold onto their homes longer and intensify the low inventory problem.  

In Summary

Aside from these changes directly impacting real estate, the House proposal will eliminate the state and local income tax deduction.  This directly impacts all Massachusetts taxpayers who file a Schedule A for itemized deductions. Combined with the limitations on the real estate tax and mortgage interest deductions, this could push many people out of the ability to file itemized deductions.

To counterbalance these changes, the personal exemption will go from $6,350 to $12,200.  However,  the plan eliminates the deduction for dependents.  For homeowners in the greater Boston area, even with the increased personal exemption, the reduction in itemized deductions will result in a negative financial impact.

The National Association of Realtors (NAR) estimates that the impact of these changes will reduce home values by 10%.

The NAR is taking several actions to address these concerns.  They are spending millions from the dues we Realtors pay to lobby for changes to these provisions that harm home ownership.  NAR is also investing in ad campaigns in many markets to raise awareness.  Lastly, they are asking us Realtors to reach out to our representatives to express our concerns. 

This plan has not yet passed through the Senate, so there is still time for you to get involved. If you wish to reach out to your representatives, you can do that here – Take Action

And, of course, if you have any questions on all these, please ask.

Michelle J. Lane

MICHELLE J. LANE, Realtor
Century 21 Commonwealth
CELL: 617 584-3904