The Tax Reform Act of 2014 – What You Need to Know

Efforts to simplify the nation’s tax code sounds like a simple enough idea. It sounds like good news until you read through Michigan Congressman Dave Camp’s Tax Plan and see that the proposed ideas will hit homeowners the hardest.

The proposals behind the Tax Reform Act of 2014 promises to provide a big financial blow to first-time home buyers, homeowners who have seen large gains in value for their principal residence, jumbo mortgage seekers and homeowners who are looking to make their homes more energy efficient. 1

It’s important to note that the proposal is not law yet – but we want to show you the reasons why this tax plan is a bad idea for REALTORS® and homeownership.

Increase in Standard Deductions

The new plan would consolidate current standard deduction and personal exemptions into one increased standard deduction. This standard deduction would go up from $6,200 to $11,000 for singles and $12,400 to $22,000 for married couples. While this may sound good in theory, it would be devastating for current tax incentives for homeowners. The new
standard deduction would diminish the number of Americans who can see tax benefits for owning their home. 1 2

Repeal of the deduction for state and local taxes

This especially impacts homeowners who live in high property tax states. It would eliminate one of the major tax incentives available for owning a home. “Its repeal would significantly decrease the number of homeowners who would have enough deductions to itemize them on their tax returns because individuals would also lose the ability to deduct state and local income or sales tax. When combined with the increase in the standard deduction, it strikes a massive blow to the current incentives for homeownership,” according to a NAR Issue Brief. 1 2

Sweeping limitation on deductibility of mortgage interest

Under this proposal, deductions for mortgage interest are slashed in a big way. The maximum amount of debt you’d be able to deduct would be $875,000 in 2015, $750,000 in 2016, $625,000 in 2017 and $500,000 in 2018 and later, and interest paid on home equity would not be deductible after 2014 (this down from a current $1.1 million debt deduction and $100,000 in home equity debt). For higher-priced markets, the effect would be instant and particularly damaging for new home purchases in higher ranges. However, in the long run these proposed limitations become even more harmful. NAR estimates at least one quarter of U.S. homes will have values above $500,000 in ten years. 1 2

Exclusion of gain from the sale of a principal residence

Current laws allow homeowners to exclude up to $250,000 ($500,000 for married filing jointly) of capital gains if you’ve owned and lived in the home for at least two (of five) years. Camp’s plan changes the rules so that the exclusion only applies to those who have lived in a home for five of the eight years prior to a sale. It also limits this deduction so it only applies once in any 5-year time span. This has the potential to hit median-income homeowners as they see their home values go up as the market recovers. The new proposal also phases out the exclusion by a dollar for every dollar a taxpayer exceeds an adjusted gross income of $250,000. 1 2

Repeal of deductions for moving expenses

Starting in 2015, the plan removes deductions for moving expenses, even if you are required to move because of work. This exclusion, combined with the exclusion of gain from the sale of a principal residence, would punish millions of homeowners needing to sell a home because of employment or unexpected life changes, impacting economic growth as it restricts the mobility of the workforce.

Repeal of green home improvement/energy credits

Current credits of up to $500 for energy-efficient windows, insulation or other green home improvement would be repealed. In addition, credits for installing solar, wind or geothermal systems would expire December 31, 2016 and would not be renewed under Camp’s plan. Repeal of deductions for personal casualty loss Homeowners in Colorado (a place hit by fires, storms and floods) will be hurt by this change. Starting in calendar year 2015, deductions for casualty losses will be zero. Currently, homeowners are able to deduct casualty losses to the extent they exceed 10%. 1 2

Other proposed changes that directly impact Colorado REALTORS®:

• Camp’s plan repeals the rules allowing deferral of gain on like-kind exchanges, effective for transfers after 2014. Repealing these rules would remove liquidity from the market, limit transactions, and generally increase the taxation of real estate.
• Changes in rules determining net earnings from selfemployment
• Repeal of exception to 10-percent penalty for distributions from IRAs for first-time home purchases
• Repeal of mortgage credit certificates
• Permanent extension of expensing depreciable business assets for small businesses
• Repeal of tax credits for smaller firms that provide health insurance to employees 2

This is a conservative list of proposed changes. To read NAR’s Issue Brief on the Top 10 Things REALTORS® Know about the Camp Tax Reform Proposal, Click here.

Sources:
1. http://www.forbes.com/sites/ashleaebeling/2014/02/26/camp-tax-planhits-
homeowners-real-estate-industry-hard/
2. http://www.ksefocus.com/billdatabase/clientfiles/172/4/1961.pdf