Several provisions of the new tax law (and one provision that was not changed) have an impact on the housing market:
Mortgage interest deductions: Effective on January 1, 2018, the new law reduces the maximum amount of mortgage debt to acquire a first or second residence for which you can claim itemized interest expense deductions from $1 million (or $500,000 if you use married filing separate status) to $750,000 (or $375,000 if you use married filing separate status). However, this change doesn’t affect home acquisition mortgages taken out under binding contracts in effect before Dec. 16, 2017 as long as the home purchase closes before April 1, 2018.
Also, the old-law $1 million/$500,000 limits continue to apply to home acquisition mortgages that were taken out under the old-law rules and are then refinanced after this year (as long as the refinanced loan principal doesn’t exceed the old loan balance at the time of the refinancing). Starting in 2018, the new law also eliminates the old-law rule that allowed interest deductions on up to $100,000 of home-equity loan balances.
Deductions for state and local sales and property taxes: The deduction for state and local income, property and sales taxes is capped at $10,000. Currently, taxpayers can deduct what they pay in state and local property, income, and sales taxes from their federal returns. The new law caps these deductions-which can be any combination of property, income, and sales taxes-at $10,000.
No change in home sale gain exclusion rules. The new law preserves the valuable break that allows you to potentially exclude from federal income taxation up to $250,000 of gain from a qualified home sale, or $500,000 if you are a married joint-filer, if the home which is sold was used as your principal residence for at least two of the five years prior to your closing on the sale. The earlier House and Senate bills both included restrictions on this break, but none of the proposed changes made the cut so it’s business as usual with respect to this provision. Good!