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Home equity tax perk slashed in GOP overhaul

It has been widely reported that the Republican tax overall will water down or eliminate popular housing incentives, such as the deductions on mortgage interest and most state and local taxes.  

Both the House and Senate bills also propose changes that could potentially restrict homeowners’ mobility, and take away a tax perk when tapping home equity, industry analysts say.

heloctaxbreakThese changes haven’t gained much attention, but these analysts say this is another area where middle-class homeowners also lose under the pending changes to the tax code.

The first change relates to home equity. Under the current law, a homeowner can deduct interest on “home equity indebtedness” up to $100,000. This has meant that most homeowners could claim an interest deduction on a home equity line of credit (HELOC).

One of advantages of a HELOC is flexibility. The proceeds can be used for any purpose, including home improvements and repairs, but also for nonhousing-related expenses such as covering medical or emergency expenses, or college tuition costs.

The Senate bill, which was passed early Saturday morning, specifically eliminates the category of “home equity indebtedness” for the tax year beginning in January through Dec. 31, 2025. The homeowner won’t be able to deduct the interest on any loan defined as home equity indebtedness through that period. Afterward, the provision sunsets. 

The House bill, which was approved last month, contains different language, but has the same practical effect of eliminating that category in next year's tax year, industry analysts say. The changes in the House bill are permanent, and would apply to debt incurred on Nov. 2 of this year or afterwards. 

The language in both bills is somewhat ambiguous, however. Some tax analysts believe that the changes will disqualify interest deductions on all HELOCs, while others believe that filers can still deduct interest on a HELOC when the money is used to renovate or repair a home.

Both bills also are somewhat unclear as to the treatment of refinanced debt that cashes out home equity. Borrowers may still be allowed to claim interest deductions on debts that tap home equity when the proceeds are used for home repairs and renovations.  

As for the treatment of mortgage interest generally, the House bill is more restrictive. The Senate bill allows filers to deduct for interest on mortgage debt up to $1 million. The House bill caps the mortgaged debt at $500,000, and restricts that only to primary homes.  

The deduction for mortgage interest is only available to filers who itemize. Both the House and Senate bills nearly double the standard deduction, a move that would drastically limit the number of filers who itemize and get a perk for owing a home, according to the Urban-Brookings Tax Policy Center.

Capital gains

Another change in both bills that is potentially a setback for homeowners, according to the industry, involves the deduction for capital gains in a home sale. Both the House and Senate bills call for increasing the period individuals must live in their homes in order to qualify for a capital-gains exclusion (on proceeds up to $250,000 for individuals and $500,000 for joint filers) to five out of the last eight years — compared to the existing requirement of two out of the past five years.

“This will put a large burden on people who need to move quickly and also people who do not need to move, but are just considering some improvement in their lives — say, a better home or a better school district,” National Association of Realtors Chief Economist Lawrence Yun told Scotsman Guide News last week.

“The tax reform is, in essence, saying, stay put,” Yun said. “Don’t move. If you move, we will tax you.” 

The Senate and House still need to reconcile both bills, and pass a final version. GOP leaders and the Trump administration have set a goal of passing a comprehensive tax package before the end of the month.  


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