Hoping to buy or sell a home this summer? Review some tax rules related to home sales and deductions for mortgage interest, property taxes and work-related moving expenses. Bear in mind that some rules have changed under the Tax Cuts and Jobs Act (TCJA).

Timing matters

Spring and early summer are typically the most lucrative times to put your house on the market and shop for new digs. Why?

• Well, for one thing, coinciding with the school year helps a lot. Even if you don’t have kids, the house you might be interested in buying might currently be owned by parents, who don’t have the time during the year to schedule visits and open houses.
• Moving is much easier when the weather is mild.
• As of late, some are moving due to rising mortgage interest rates. They have been increasing since 2016, a trend that is expected to continue in 2018.

Think about taxes.

If you’re selling a house that’s increased substantially in value from when you bought it, you should take advantage of the home sale gain exclusion. If you qualify for this tax break, the profit from selling your principal residence will be free from federal income taxes, and possibly state income taxes as well.

The gain exclusion rules

An unmarried homeowner can potentially sell a principal residence for a gain of up to $250,000 without owing any federal income tax. If you’re married and file jointly, you can potentially pay no tax on up to $500,000 of gain. You must pass two tests to qualify, however:

1. Ownership test- You must have owned the property for at least two years during the five year period ending on the sale date. (For joint filer exclusion, at least one spouse must pass.)
2. Use test- You must have used the property as a principal residence for at least two years during that same five year period. (For joint filer exclusion, both spouses must pass this)

*Note if you make what’s known as a premature sale that happens less than two years after an earlier sale (which you claimed an exclusion on) you can claim a reduced exclusion if your sale is due to health reasons, certain unforeseen circumstances outlined in IRS regulations or a change in place of employment.

Did the TCJA change anything?

Yes. There are some unfavorable provisions for homeowners included in the TCJA including some bad news about home related deductions.

For the next eight years (through 2025):

1. There is a $10,000 limit on state and local tax deductions ($5,000 for separate filers)
2. The mortgage acquisition debt limit has been reduced to $750,000 for new home purchases ($375,000 for separate filers)
3. The deduction for interest on home equity debt is available only if the loan was used for home improvements. If the home equity loan is used to pay off credit card debt, you cannot claim the deduction.
4. The above the line moving expense deduction has been eliminated.
5. An employee’s can no longer exclude the value of employer-provided reimbursements (for moving expenses) from taxable income. This has been suspended.

All the above provisions are set to expire on January 1, 2026 unless Congress votes to extend them.

As you look to sell your home and purchase a new one, be sure to factor in not only timing, but taxes, too. Having trouble getting started? We can help. Reach out to our Tax Services Team today.