Proposed Tax Overhaul Could Have Significant Impacts on Real Estate

The new tax bill introduced to Congress last Thursday, and being pushed by the Trump administration, includes some important provisions that could impact how people buy and sell homes in the future.

Currently, homeowners can deduct interest paid on their home mortgage from their annual income tax calculations, and many homeowners depend on this deduction to help make homeownership more affordable. Interest can be deducted for mortgages that are up to $1,000,000 (on two residences), and interest can also be deducted for home equity lines of credit that are up to $100,000. The proposed law will make three important changes: (1) interest will only be able to be deducted for mortgages that are up to $500,000; (2) interest will only be able to be deducted for one residence, not two; and (3) interest will no longer be able to be deducted for home equity lines of credit.

While many of our clients in Western Massachusetts won’t be affected by the first change (because the price of residential real estate is relatively lower than it is in many metropolitan areas), the second change will make it much harder for people to afford a second vacation home. Additionally, many of our clients utilize home equity lines of credit as a way to help pay for their children’s college education, and no longer being able to deduct the interest for those loans will make them that much more costly.

Another important change relates to the way capital gains are calculated and taxed on your primary residence when it’s sold. Currently, a single individual is able to exclude up to $250,000 in gain on their primary residence and a married couple is able to exclude up to $500,000. This exclusion ensures that you won’t be penalized and taxed when you sell your primary residence just because your home has increased in value over time, and can save long-term homeowners tens of thousands of dollars in taxes. There are certain requirements for the seller to qualify for the exemption, however — the most important of these requirements is that the seller must have owned and used the property as their primary residence for 2 out of the last 5 years. Further, the exclusion can only be used once every 2 years.

The newly proposed law will change these requirements so that a homeowner will only qualify if they’ve owned and used the home as their primary residence for 5 out of the previous 8 years (so that someone who had only lived in the property for 4 years would not qualify), and so that a homeowner can only claim the exclusion once every 5 years (penalizing someone who moves in less than 5 years). Considering that the American Housing Survey shows only about 25% of homeowners continue owning their property for more than 5 years, and other studies show that the median length of homeownership is only 5.9 years, these changes to the capital gains exclusion could have a significant impact on many more people than realized.

If you’re purchasing property and concerned about the mortgage interest deduction, or if you’re thinking about selling your property, contact Michael Gove at or413-583-5196 to talk about these potential changes.

For further reading about the Senate’s proposed mortgage interest tax deduction changes, check out this piece from Forbes.