The Joint Committee on Taxation’s Comparison on House and Senate Tax Bills has been Released: How will San Diegans be Impacted

On December 7th, 2017 the Joint Committee on Taxation (“JCT”) released its COMPARISON OF THE HOUSE- AND SENATE-PASSED VERSIONS OF THE TAX CUTS AND JOBS ACT. Currently, the two versions of the new tax bill are undergoing a period of reconciliation to determine which provisions will stay and which will go. In the meantime, the JCT report helps clarify the current differences between the bills. More specifically, for the individual tax reform, it breaks down into three categories (view the JCT report):

  1. Differences
  2. No Differences
  3. Unique to the House or Senate Bill

 Home Mortgage Interest Deduction

The new tax legislation will impact all San Diegans in different ways. However, one section may have a more meaningful impact on San Diego than many other parts of the country. I am referring to the proposed limitation on the Home Mortgage Interest Deduction. First, we will take a look at the two possible outcomes (based one which provision is adopted). Then, we will discuss why it matters.

House Version

  • -Lowers the limitation on qualifying indebtedness to $500,000. Indebtedness incurred on or before November 2, 2017 is grandfathered at $1,000,000.

  • -Eliminates the deduction for interest on indebtedness incurred to purchase a second home.

  • -Eliminates the deduction for home equity interest indebtedness.

Senate Version

  • -Eliminates the deduction for home equity interest indebtedness.

As you can see, the House is proposing to reduce the limitation to $500k. Essentially, this means any mortgage interest attributable to the value which exceeds $500k will not be deductible (for purchases made after 11/2/2017). In many parts of the country, this proposed change will have little to no impact. However, in San Diego County, where the median price for a house is $515,000, the tax bill will become a factor in certain home purchases.

Again, even if the House version is adopted, this will not change any current situations (because previous purchases are grandfathered in). Nevertheless, it will create different results for future home buyers (and potentially sellers, especially if buyers factor in the loss of tax savings).

What About the Capital Gain Exclusion on the Sale of a Primary Residence?

Another notable change, that may have some unique affects on San Diegans is the proposed modification to the exclusion of gain from the sale of a primary residence. Currently, you are able to exclude $250k/$500k (depending on filing status) of capital gain from the sale of your primary residence if you lived in it for two out of the previous five years. One way or the other, it looks like the holding period will be changing. Take a look:

House Bill

  • -Modifies the holding period requirement such that a taxpayer must live in the residence for five out of the eight prior taxable years.

  • -Exclusion applies only to one residence every five years.

  • -Exclusion phases out based on modified adjusted gross income ($250,000/$500,000) measured over the average income for taxable year and two prior years.

Senate Amendment

  • -Modifies the holding period requirement such that a taxpayer must live in the residence for five out of the eight prior taxable years.

  • -Exclusion applies only to one residence every five years.

Joint Committee on Taxation, Comparison of the House- and Senate-Passed Versions of the Tax Cuts and Jobs Act, (JCX-64-17), December 7, 2017. The document can be accessed at www.jct.gov.

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