Homeowners might want to consider prepaying certain house-related expenses this year in advance of tax legislation that could clear Congress as early as this month.
The Senate passed its version of tax reform in the wee hours of the morning on Saturday and now will begin hashing out differences with the House bill, which passed in mid-November. While lawmakers work out the details — with the goal of getting final legislation to President Trump by the end of the year — homeowners may want to anticipate various provisions that could affect what they can and can't write off.
Because most deductions currently available to individuals would disappear under both versions of the bill, and the standard deduction would nearly double, fewer taxpayers would itemize deductions. This means that even if some tax breaks related to homeownership are retained in their current form, you might not have enough deductions in 2018 and onward to make itemizing worthwhile.
Here are the tax-bill provisions that could change the tax benefits of owning a home, along with some strategies for this year to maximize deductions before the tax code changes:
Due to a last-minute change in the Senate bill, both it and the House version would allow property tax deductions up to $10,000, while eliminating other write-offs for state and local taxes.
Current law allows you to write of the full amount of property taxes paid, although other parts of the tax code — i.e., the alternative minimum tax — can reduce that break's usefulness, especially for higher-income taxpayers.
For homeowners not subject to the AMT, however, prepaying some 2018 property taxes this year could boost the value of their deduction. The Internal Revenue Service allows you to write off property taxes in the year you pay to the taxing authority.
Keep in mind, though, that money put into an escrow account isn't considered paid until it is disbursed to the taxing authority — and would have to be paid out this year to qualify.
Mortgage interest deduction
This is one of the few home-related deductions for individuals that would remain, with some modifications.
Under current law, you can take a deduction for the interest you pay on up to $1 million of mortgage debt (plus $100,000 of home equity debt), which applies to your first and second homes. Although the Senate bill retains that ceiling, it eliminates the deductibility of interest paid on a home equity loan or line of credit.
The House bill, meanwhile, reduces the cap to interest paid on $500,000 of mortgage debt. Although it makes no mention of interest on home-equity loans, it would limit the deductibility of mortgage interest to primary residences. This means that the interest on loans for vacation homes — including qualifying recreational vehicles and boats — would no longer be deductible if the provision makes it into final legislation.
While part of the tax code generally disallows prepaying interest, the IRS gives you a one-month reprieve. In other words, you can prepay January's mortgage payment in December and write it off this year.
"But if you go beyond that, the interest is allocated to 2018," said Bill Smith, managing director at CBIZ MHM's National Tax Office in Bethesda, Maryland.
If you do prepay, make sure the Form 1098 sent by the lender to both you and the IRS reflects the payment. If you report a different number from the form, it will trigger a red flag at the IRS.
Selling your home
You might have to plan on staying put longer. Currently, when homeowners sell their home, they can exclude the first $250,000 ($500,000 for joint filers) from capital gains taxes if they have lived there for two of the five years preceding the sale. Both the Senate and House bills would change that requirement to five of the past eight years.
In other words, if you were thinking about selling your house in the next couple of years but have only lived there for a short time, you could owe taxes on any gain from the sale.
The tax code currently allows hardship exemptions to that two-year rule, and it's unclear at this point whether a similar exemption would be available under the revised five-year requirement, said Tim Gagnon, an associate teaching professor of accounting at Northeastern University's D'Amore-McKim School of Business.
"It's hard to know if the IRS will modify the current [rules] or throw it out entirely," Gagnon said.
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