Homeowners, though, will get some breaks. First, for the present at least, Congress did not modify or repeal your right to deduct the mortgage interest you pay. There are, however, some limitations for high-income earners. If you are single and earn more than $400,000 (or more than $450,000 if married), personal exemptions will be phased out and itemized deductions will be limited. If you fall in that category, you must discuss your specific situation with your tax and financial advisers.
Second, despite threats to the contrary, Congress did not increase the capital gains tax rate for people who are not high-income earners. If you are not in the high-income bracket and sell investment property, you will still pay 15 percent federal capital gains tax. Higher-income earners will now be hit with a 20 percent tax.
If you sell your principal house and have lived there for at least two of the five years before it is sold, you can exclude up to $250,000 of your gain if you are single (or up to $500,000 if you are married and file a joint tax return). That can create major financial problems for many people who bought their homes years ago, took advantage of the incredible appreciation during the early part of this century and now will make a profit over the exclusion amount.
Third, the annual gift tax exclusion has been increased to $14,000 per year, from $13,000. That means, for example, that a married couple can give their son and his wife up to $56,000 tax free. (Father and Mother each give $14,000 individually to their son and daughter-in-law.) That additional money will go a long way toward a down payment on a starter home for the young couple.
Fourth, the stepped-up basis has survived. That means the tax basis for a deceased homeowner’s heirs will be the fair market value of the property on the date of death. For example, John bought his house many years ago for $100,000. (For this discussion, we will ignore any improvements that might increase the tax basis.) John just died, and the house is appraised at his death at $800,000. The tax basis for John’s heirs will be $800,000. If they sell the property for that amount, they will not have to pay capital gains tax; they made no profit.
Contrast that with a situation in which John gives the house to his daughter Jenny as a gift. The law is clear: The tax basis of the gift giver (donor) becomes the tax basis of the gift receiver (donee). Thus, unless Jenny can claim the capital gains exclusion mentioned above or can find some other way to legally avoid or defer paying the capital gains tax, she may have to give the IRS a lot of money.