How the Tax Cuts and Jobs Act Affects Homeowners
At the end of 2017 the Tax Cuts and Jobs Act was passed affecting taxpayers and in particular, homeowners. The previous wish of living the American Dream and owning a home may decrease for some with these new laws, but it shouldn’t have a huge effect on the overall market.
Let’s explore how the new tax law could affect you in your future real estate transactions.
Mortgage Interest Deductions
Claiming mortgage interest as a deduction helps make home ownership more affordable by reducing taxable income by the amount of mortgage interest paid. Prior to the new tax laws, you could have deducted the interest you paid on a mortgage debt up to $1 Million. With the new laws, if you bought your home after December 14, 2017, you may now only deduct the interest on a mortgage debt up to $750,000. If you bought your home before December 14th, your deduction will stay the same.
This new law seems to hurt high-end homeowners most, as it will now be more expensive to buy high-end homes. Owners of expensive homes may not want to sell so they can keep their current tax deductions that are grandfathered in, which could hurt the selling market. They won’t want to buy another home that costs more than $750,000 since they will need to then follow the new tax laws. If they do sell their home, they may want to buy less expensive homes, taking away from the already tight market in those price points. Some luxury homeowners could try to factor these extra costs into their asking price when selling.
Because the standard deduction has doubled, and you would have to itemize to take advantage of this tax rule anyway, fewer people are expected to itemize deductions (we will explain more on this later so keep reading). Since most homes in the US are worth less than $750,000, most won’t be affected by this law.
Refinance
One small thing to point out is if you refinance your mortgage, your new loan will be treated as having the old loan’s origination date and you would be able to use the old limit of $1 million if you bought the home prior to December 14, 2017. This is good news for many homeowners!
Standard Deductions
The standard deduction for the new tax law has been doubled. It is now $12,000 if you’re filing as single person, and $24,000 if you’re filing jointly. Because of this change, it’s predicted that fewer taxpayers will itemize deductions. A big concern is that doubling the standard deduction has removed the tax incentive of owning a home, giving less reason to itemize deductions.
Property Tax Deductions
Prior to this new tax law, you could reduce your taxable income by the total amount of property taxes you paid with no cap, but with this new law you are capped at $10,000 for the cost of property taxes, state and local income taxes, and sales tax combined.
Homeowners in states with high taxes, such as many of our coastal states, are having a hard time adjusting to this change as a lot of Americans pay more than $10,000 a year in property taxes alone. This law change could deter many from buying a home.
Tax Rates
Tax rates have decreased for most individual tax filers. These rates haven’t been touched in decades so this is a welcome change for many single Americans.
Home Equity Lines of Credit
Previously there was a deduction on interest paid on home equity debt. Now with the new tax laws, the interest on home equity lines of credit are no longer eligible for interest deductions unless being used to buy, build or improve your home.
Moving Expenses
Under the previous tax law, you were able to deduct moving expenses if you moved for work and met the criteria. Under the new tax law, this only applies to Active Duty military members.
Secondary/Vacation Homes
As far as second homes go, if your primary home exceeds the $750,000 mortgage limit, you will not be able to deduct interest on your second home. However, if you have a smaller mortgage on your primary home, you can deduct any amount up to $750,000. Also, due to the cap on state and local income tax deductions at $10,000, most people that are thinking about purchasing a second home have already exceeded this amount. Just make sure you know the rules. Tax rules are different for second homes and rental properties. If you use the home more than 2 weeks a year it is considered a second home, even if you rent it out the rest of the year.
A Few More Things
The Capital Gains Exclusions remains the same on a principal residence, with $250,000 for single taxpayers and $500,000 for a married couple as long as you have owned and lived in the home for 2 of the past 5 years.
Investment property owners can still take advantage of deferring capital gain using the 1031 tax deferred exchanges, though it will now only be allowed for real property, not personal property. The new law keeps the 20% tax credit for the rehabilitation of historic properties, but you must claim the credit over a 5-year time period.
Student loan interest deduction remains the same, and the child credit has been increased.
There is so much more to the Tax Cuts and Jobs Act. This is just a starting point. If you would like to read more about these tax changes, visit the National Association of Realtors' Tax Reform page.
This tax law will benefit many home buyers, sellers, homeowners, investors, etc. It may also hurt some. But there shouldn’t be a tremendous change in the market in most areas. There is potential for high tax areas to see a reduction in property values. The cap on the state and local deduction and the higher standard deduction may hinder home appreciation but population, employment, and interest rates will most likely have a greater effect on the market as a whole.
The raise in the standard deduction may have reduced the tax incentive for homeownership, making it about the same to rent and buy… but not everyone purchases a home for the tax benefits. There are still many who purchase homes because they want to own their home, they don’t want to follow a landlord’s rules or they want to put down roots -- which are all great reasons!
Because so many factors have been affected with this new law beyond just the homeownership related deductions and each taxpayer has a different situation, it’s imperative that you speak to a trustworthy and knowledgeable tax professional to find ways to save throughout the years to come.
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