In an effort to simplify the nation’s unwieldy tax code, Rep. Dave Camp (R-Mich.) is socking it to homeowners. His proposal as chairman of the House Ways & Means Committee, The Tax Reform Act of 2014, hits first-time home buyers, jumbo mortgage seekers, homeowners who have ratcheted up big gains in their primary residence, and even homeowners who are aiming to green their homes by making them more energy efficient. Of course, the proposals aren’t law – yet— but here’s where his plan would hit home. The context is streamlined individual income tax rates and an outsized standard deduction. But if you’re a homebody, you’re likely going to be paying more in taxes.
Drastic limit to mortgage interest deduction. Today you can deduct mortgage interest on up to $1.1 million in debt ($1 million in acquisition indebtedness and $100,000 in home equity debt) on a principal and second residence, but under Camp’s tax reform proposal that is reined in big time. The maximum amount of indebtedness on which you could take the mortgage interest deduction would be $875,000 in 2015, $750,000 in 2016, $625,000 in 2017 and $500,000 in 2018 and later. Interest paid on home equity indebtedness would not be deductible after 2014. Special rules apply in the case of refinancing as long as you aren’t taking out a bigger mortgage.
Tightening of exclusion of gain from sale of principal residence.Camp’s proposal tightens the rules for excluding gain from the sale of your home. Currently you can exclude $250,000 ($500,000 for a couple) of gain if you’ve owned and used the residence as your principal residence for at least two of the five years before you sell. The proposal changes the rules so that it only applies if you’ve used the residence as your principal residence for at least five of the eight years prior to the sale. It also limits the exclusion so it only applies once during any 5-year-period (up from 2 years). And it phases out the exclusion by one dollar for every dollar a taxpayer’s adjusted gross income exceeds $250,000 ($500,000 for a couple).
Repeal of “green” home improvement credit.The credit of up to $500 for making energy-efficient home improvements like installing new windows or adding insulation in your primary residence would be repealed. The credit, one of the tax extenders that expired on Dec. 31, was good through 2013, so if you made any improvements that count last year, make sure you claim them on the 2013 tax return you’re filing now. The Alliance To Save Energy explains how here.
Repeal of “green” energy credits. The 30% off federal credit for installing solar, wind and geothermal systems to power your home currently expires Dec. 31, 2016, but it was hoped that it would be made permanent. Instead Camp’s proposal would move the expiration date up to Dec. 31, 2014. These projects take time to plan, so if you’ve been considering greening your home but delaying, you might want to act now. The federal incentive, on top of state and local incentives, make a big difference. For a comprehensive list of incentives, check out the North Carolina Solar Center’s database of state incentives for renewable & efficiency here.
Repeal of exception to 10-percent penalty for first-time home purchases. Typically you have to pay a 10% penalty (plus income tax) on any money you take out of your Individual Retirement Account before you’re 59.5 – but one of the exceptions to the penalty says that you can take up to $10,000 to buy a home under certain circumstances. Camp’s proposal eliminates the first-time home purchase penalty exception. This will make it tougher for home buyers to come up with cash for a down payment, and it could discourage IRA savings.
Repeal of deduction for personal casualty losses. If you live in a state prone to natural disasters (fires, storms, floods), the repeal of the deduction for personal casualty losses will hurt you. Instead of being able to deduct casualty losses to the extent they exceed 10% of your adjusted gross income, the deduction will be zero, starting in calendar year 2015.
Repeal of deduction for moving expenses. Thinking of moving for work? The proposal repeals the deduction for moving expenses starting in calendar year 2015.
You can read a technical explanation of Camp’s tax reform proposal by the Joint Committee on Taxation here.