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Tax Reform: Both U.S. House And Senate Hit Homeownership Benefits

Thousands of Chicago homeowners and prospective home and condominium buyers are likely squeezing their wallets and holding their breath as proposed tax reform legislation inches its way through the U.S. Congress.

Tax reform legislation proposed by the U.S. House takes a historic step in directly revising the mortgage-interest deduction—a $70-billion annual tax expenditure.

While the House version of the Tax Cuts and Jobs Act would let homeowners keep their existing mortgage interest deductions, future home purchase mortgage deductions will be capped at up to $500,000.

In contrast, the Senate version of the tax reform bill retains the current $1-million ceiling on home-mortgage amounts that are eligible for interest deductions. The Senate bill also leaves intact mortgage-interest deductions on second homes, which would be eliminated under the House bill.

Any change in the coveted home-mortgage interest deduction will directly have a negative effect on the average American homeowner, stressed lobbyists for the National Association of Realtors and National Association of Home Builders. According to the Internal Revenue Service, half of the 32 million households claiming the home mortgage deduction earned less than $100,000 annually.

Generally, Americans view the $1.5-billion tax reform bill as benefiting the wealthy and corporations, according to opinion polls. People are skeptical tax reform will do much for middle-class taxpayers.

Write-offs for property taxes are yet another target of both the House and Senate bills.

The so-called SALT (State And Local Tax) write-offs—deductions of state and local property taxes, sales taxes and income taxes—takes a heavy hit. Under the Senate bill, SALT is killed outright. The House version limits the real estate-tax write off to $10,000. However, under the Senate version of the bill, million-dollar homeowners in the Loop, Gold Coast, Lincoln Park, Lake View, Edgewater and other upscale lakefront Chicago neighborhoods with property tax bills of $20,000 to $25,000-plus would completely lose these huge tax write-offs.

Even if the real estate tax deduction was cut to $10,000 under the House bill, it would mean the loss of $15,000 or more in write offs for owners of a $1-million Chicago home or condo, experts said.

Both the Senate and House bills also make a major change in one of the most valuable current tax benefits of homeownership—the right to pocket capital gains on home sales without paying federal income taxes.

Under current tax laws, married home sellers filing joint federal tax returns can exclude up to $500,000 of capital gains from the sale tax free if they have resided in and used the property as a principal residence for two out of the preceding five years. For single homeowners, the tax write off for capital gains is $250,000.

To cut homeownership tax write-offs and rein-in house flippers, both the Senate and House bills also tinker with the capital-gains formula. To qualify, sellers would have to live in their homes for five of the previous eight years to use this benefit, and could only use the tax-free provision once every five years.

“If eligibility rules for excluding the sale of a home from capital gains taxes are changed from requiring living in your home for two of the past five years, to five of the past eight, selling the median U.S. home after four years of ownership would mean paying $2,363 in federal taxes, up from zero currently,” said Skylar Olsen, Zillow Senior Economist.

Changes in the capital gains rules also could create tax issues for transferee homeowners and young married couples starting a family who are trying to move up from a starter home in less than five years.

The Senate bill also makes changes in write-offs for home equity loans. The Senate erases the entire category known as “home equity indebtedness” from the tax code, which now allows write offs for up to $100,000 in debt. Homeowners with existing first mortgages might still be allowed to borrow against their equity, but could be limited to using the money only for improvements to a principal residence.

There is one bright spot in the Senate version of the tax reform bill. It preserves the federal historic-tax credit which provides a 20% credit for developers who do historic rehab of income-producing properties.

Unfortunately, the historic-tax credit doesn’t affect the average American homeowner or taxpayer.

For more housing news, visit Don DeBat is co-author of “Escaping Condo Jail,” the ultimate survival guide for condominium living. Visit

“The book is Escaping Condo Jail by Sara Benson and Don DeBat. I would say that anybody thinking about buying a condo, or even anybody serving on a condo board, or anybody who has any connection to a condo, this is must reading—all 600 and something pages. Thanks a lot for a great book!”


Steve Sanders, “Your Money Matters” WGN TV, December 22, 2014

By Don DeBat

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