Yesterday, Senate Finance Committee Republicans released their version of the tax reform bill. Although it goes one step further than the House bill by preserving the $1 million cap on the mortgage interest deduction—rather than cutting it to $500,000—it eliminates the deduction for property taxes. These are among the important differences between the plans, both versions of which will lead to higher taxes for many middle-income homeowners and lower property values overall, NAR says.
“Simply preserving the mortgage interest deduction in name only isn’t enough to protect homeownership,” NAR President Elizabeth Mendenhall said in a statement yesterday.
NAR’s concern is twofold. First, by almost doubling the standard deduction while repealing or limiting most itemized deductions, both plans would eliminate the current law’s tax incentives for buying or owning a home. Secondly, because both versions would also eliminate the personal and dependency exemptions, many middle-income families would end up paying more in taxes instead of getting a tax cut.
In addition to the differences between the two versions of tax reform on the MID and the property tax deduction, which the House bill keeps but limits to $10,000, the Senate plan features seven tax brackets. The House bill consolidates the brackets into four and raises the lowest bracket to a 12 percent tax rate from 10 percent. The Senate keeps the lowest bracket at 10 percent.
Both bills will drastically curtail the exclusion on the capital gain from the sale of a principal residence. The exclusion allows single individuals to disregard taxes on up to $250,000 and married couples up to $500,000 of gain from the sale. But in a change both plans seek, it would be harder to qualify. Sellers will have to live in the home for five of the last eight years to take the exclusion, up from two of the last five years in the present law. And, under the House bill, higher-income households would see the benefit reduced.
The House keeps the highest tax bracket at 39.6 percent, while the Senate plan cuts it to 38.5 percent. In other differences, the House doubles the exemption for the estate and gift tax, before repealing it altogether after six years, while the Senate doubles the exemption with no repeal. On the corporate side, both versions lower the top-end rate to 20 percent from 35 percent, but the House makes it effective for 2018 while the Finance Committee delays the drop until 2019.
Lawmakers in the Senate are constrained by budget rules to keep the net cost of reforms to $1.5 trillion over 10 years; otherwise they need a supermajority of 60 votes to pass the bill. As long as they meet the budget rule, they only need a simple majority to pass, a threshold that means it’s possible for them to pass the bill on a party-line vote.
NAR continues to analyze the Senate proposal as well as the House bill, which was passed by the tax-writing Ways & Means Committee yesterday. The House bill was amended in significant ways this week prior to passage, but provisions that will affect homeowners remain in place. REALTORS® will be on Capitol Hill next week letting members in both chambers know that homeowners should not be shouldering the burden of reform by paying higher taxes so corporations can get a tax cut.
“We are watching closely for changes to current law that might leave middle-class homeowners—and homeownership broadly—in a worse place than it is today,” Mendenhall said.
Access a summary of the bill here and learn more about it in this week’s Voice for Real Estate:
—Robert Freedman, REALTOR® Magazine