Some home sellers would need a sale contract inked before the end of 2017 in order to avoid a big tax bill that would be imposed if the tax reform being proposed become law. Both the House and Senate bills would require sellers to have lived in their residence for a longer period of time–at least five years out of the last eight; rather than the two years out of the last five in effect this year–before qualifying for the capital gains tax exclusion on the sale of a primary home.
The Senate version, however, includes an exception for transactions in which a contract is written before Jan. 1, even if the closing occurs in 2018. The bill passed by the House includes no such exception.
Therefore, homeowners who are currently thinking about selling have only one month left to complete a deal before proposed tax changes would take effect, meaning some homeowners who sell in 2018 may no longer qualify for the capital gains exclusion, which covers up to $250,000 for an individual and $500,000 for a married couple. As a result, the difference between your client’s tax bill pre- and post-tax reform could be huge.
It won’t be known whether the House or Senate version of tax reform is adopted until the bill is finalized, which could happen in a few weeks. But sellers who haven’t lived in their house for more than five of the last eight years will want to act quickly regardless of the version that is approved.
Separately, the National Association of REALTORS® has released an interactive chart showing the estimated impact of tax reform on home values across the country. Of the nearly 7 million owner-occupied houses in California in 2016, 71% had a mortgage; 49.1% of those with a mortgage had a value higher than $500,000, while 9% of the owners paid over $10,000 for real estate taxes. Vacation homes accounted for 2.7% of the housing units in California.
Capital gains exemption
Under current tax framework, a typical owner, who has lived in his house for at least 2 years out of the last 5 years, will pay nothing in capital gain taxes if he sells his house. Under the proposed tax frameworks, owners need to live in their house for at least 5 out of the last 8 years in order to claim the exemption. Otherwise, they need to pay $28,875 in capital gain taxes.
In 2016, 13% of owners in California have lived in their homes for 2-4 years. These owners will not be able anymore to take the exemption based on the proposed tax frameworks.
Impact on housing prices
If both mortgage interest and real estate taxes deductions are eliminated, home prices expect to fall from 8% to 12%. A decline in value as projected could mean a loss in home value of $37,710 – $56,550 for the typical homeowner.
Sources: Internal Revenue Service 2015, American Community Survey 2016, National Association of Realtors® 2016, 2011; All calculations are by the NAR® Research Group.