How does the 2018 tax law affect new homeowners?
The Tax Cuts and Jobs Act took effect Jan. 1, 2018. The new tax deduction calculations could affect one or more of your home-buying considerations.
MORTGAGE INTEREST DEDUCTION
The interest on new mortgages of up to $750,000 can be deducted. Existing mortgages have been grandfathered in with the old limit of up to a $1 million Mortgage. The interest on a mortgage for a second home is still deductible, subject to the same $750,000 limit. Being a new home owner might not lower your taxes and increase your refund as much as you thought, depending on your tax bracket. This just means that you shouldn’t count on a big tax refund to help you afford the cost of a new home.
PROPERTY TAX DEDUCTIONS
Before the new law, the property tax deduction had no limit. Now, state and local taxes (including property taxes) are limited to no more than a total deduction or combined limit of $10,000 on a federal return.
The only way you might be able to deduct more than $10,000 is if you plan to use part of your home for business or to rent out part of it. In those situations, you could deduct property taxes related to the business or rental on top of the $10,000 limit.
As property taxes vary from town to town, you might consider looking for a home in a location where property taxes are not as high. However, if a large number of other buyers do the same thing, or a certain percentage of people living in those areas decide to sell, there’s a good chance you’ll see some high-tax housing markets dip in sale prices.
HOME EQUITY LOAN INTEREST DEDUCTIONS
Home equity is the difference between a home’s market value and the remaining balance on the mortgage. Homeowners can take out a home equity loan, which is a one-time loan with a fixed interest rate, or they can take out a home equity line of credit, which acts like a credit card with a debt limit based on the home’s equity.
Interest on home equity loans is deductible only if the loan is used for the purpose of improving the residence, effective through the end of 2025. If you’re thinking of remodeling, this type of loan can be one way to pay for it. Homeowners can no longer deduct home equity loan or line of credit interest from a federal return if the money is used for something else. There is no grandfathering of the deduction on an existing home equity loan.
It’s still a good idea to invest in remodeling your home. You just might want to consider different financing options. For example, Instead of taking out a home equity line of credit, you might do a cash-out mortgage refinance.
HOME SALE GAIN EXCLUSION RULES UNCHANGED
The TCJA still allows you to potentially exclude from federal income tax up to $500,000 of gain from a qualified home sale, if you are married filing jointly.
THE BOTTOM LINE
The new tax law simply means more people won’t be itemizing deductions. Potential home buyers still need to weigh the other pros of homeownership, like building wealth through equity and appreciation in value over time.
Contact a tax professional about your specific circumstance to find out more details about your tax benefits of homeownership.