What the tax changes mean for the homeownership game

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Whether you’re already a homeowner or just beginning to think about buying, you're probably thinking about what role taxes will play. With the new Tax Cuts and Jobs Act (TCJA) officially on the books, you're likely to be affected in one way or another. If you own a home, want to buy one or plan to sell, the new tax law could impact you. Here are a few things you should know so you can be financially confident this next tax season:

If you own a home…

Before the TCJA, taxpayers could deduct an unlimited amount of local property tax from their income at tax-filing time. Under the TCJA, your total state and local tax deduction (which includes property tax) is now capped at $10,000.1 The median annual property tax in the U.S. (as of 2015) was only $2,149, but this change will still affect roughly 4 million Americans who pay more than $10,000 per year.2, 3

Going forward, filing your taxes might be a little more straightforward. The standard deduction (upped to $12,000 for single filers and $24,000 for joint filers) may be higher than the total of itemized deductions for many people.Therefore, in 2018, only 4 percent of taxpayers are likely to benefit from itemizing their mortgage interest.4

If you’re buying a home…

You’ll want to evaluate your budget. For loans issued after December 15, 2017, interest paid on mortgage debt up to $750,000 is deductible.5 Prior to that, the threshold was $1 million. Though just 4 percent of last year’s mortgages were north of $750,000, homebuyers shopping in pricier real estate markets have a higher chance of being affected.6 Still, as noted above, you’ll be able to claim a larger standard deduction. 

Note: If you borrowed more than $750,000 on or before December 15, 2017, you are grandfathered in under the former tax law and will still be able to deduct interest paid on mortgage debt up to $1 million.5  (This may also apply to such mortgage debt that is refinanced after December 15, 2017.)

If you’re selling a home…

Breathe a sigh of relief. Homeowners who sell their property for a profit will still be able to exclude $250,000 in gains ($500,000 for married couples) from capital gain taxes.7 Consider though: The sold property must be your primary home, and you must have lived there for at least two of the past five years.

If you’re renting …

You’re in good company. Just 64 percent of households currently own their own home, leaving more than one-third in rental properties.6 Even though you don’t own property, you will likely still be affected by other aspects of the TCJA. Changes to the tax code could mean a boost to your paycheck. Come tax time, changes to standard deductions and personal exemptions may also be important.

If you’re considering a home equity loan or home equity line of credit…

Interest paid on home equity loans and home equity lines of credit were previously deductible up to $100,000.4 The TCJA has limited what will be deductible; However, interest-deductible HELOCs should still be available to homeowners if the proceeds of the loan are used to “substantially improve” their home, and the combined total of their first mortgage balance and their HELOC does not exceed the new $750,000 limit on mortgage amounts qualifying for interest deductions. You should consider how these limitations will affect your particular situation.8

Note: Even without the deduction perk, loans based on the value of your home are typically still a cheaper way to borrow than unsecured personal loans or credit cards.9

If you’re planning to move…

Unfortunately, you won’t be able to claim a deduction. Under the previous tax code, you could deduct certain expenses when relocating for your job. That benefit has been eliminated, except for active-duty members of the armed services.10

If you’re shopping for a second/vacation home…

The new $750,000 cap for mortgage interest deductions applies to all homes combined, not just a primary residence. So if you’re paying interest on a $500,000 mortgage for your primary residence, just $250,000 of your vacation pad’s mortgage will be eligible for deductions.11

Home buying with confidence

Find out more about approaching the home buying process with confidence.

1 “What's in the GOP's final tax plan,” Dec. 22, 2017, CNN Money
2 “Where In Your State Homeowners Pay The Highest And Lowest Property Taxes,” May 1, 2017, Forbes
3 “Making sense of the new cap on state tax deductions,” Dec. 20, 2017, CNN Money
4 “6 Things to Know About Buying a Home Under New Tax Rules,” Jan. 6, 2018, The Motley Fool
5 “How the tax bill impacts homeowners, buyers and sellers,” Dec. 20, 2017, The Washington Post
6 “New tax law is a huge win for renters,” Jan. 2, 2018, The New York Post
7 “Homeowners: Here's what's in the tax bill for you,” Dec. 17, 2017, CNN Money
8 “Did the tax code overhaul kill home equity loans?,” Jan. 17, 2018, The Washington Post
9 “Borrowers Lose Home Equity Tax Deduction,” Dec. 28, 2017, Forbes
10 “6 ways the tax plan could change homeownership,” Dec. 20, 2017 (Updated Jan. 14, 2018), USA Today
11 “Tax bill may squash your dream of a second home,” Dec. 22, 2017 (Updated Dec. 26, 2017), CNBC

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