A long-time bonus of owning a home has been the ability to reduce costs through property tax and mortgage interest write-offs. Depending on your circumstances, those savings could change for the better or worse now after the passing of the Tax Cuts and Jobs Act (TCJA), which have been in effect since January 1, 2018. Here’s what you need to know with regard to home ownership and the TCJA.
Limits on Deductions for Mortgage Interest, Home Equity, and State/Local Taxes
For 2018 through 2025, the TCJA limits deductions for home mortgage interest, property taxes, and state and local taxes.
• If you buy a home now, you can itemize deductions for mortgage interest up to $750,000 (formerly $1 million) and $375,000 (formerly $500,000) for married couples filing separately. Deduction of home equity loan interest is included in the above amount limits for acquiring or improving your home ($750,000/$375,000). Because of the new lowered cap limit on mortgage interest deductions, homeowners with homes worth close to the $750,000 mark might find it harder to sell in the next few years.
• Home equity deductions must be for acquiring or improving a home. This is a big change from prior law, which allowed deduction up to $100,000 of home equity debt regardless of how the proceeds were used ($50,000 for married couples filing separately). Now home equity loan for any other reason beyond acquiring or improving a home is flat-out non-deductible. People who borrow against their home for big purchases or to pay down other non-acquisition/home improvement debt will feel the pain.
• Itemized deductions for state and local real estate property taxes and state and local income taxes combined are now limited to $10,000 ($5,000 for married couples filing separately). This limit will most negatively affect homeowners in high cost of living locations. Buyers who bought a little more house than they planned with the idea that they’d simply write-off the extra are also hurt here. The increased standard deduction serves as an equalizer and means that the extra outlay of cash won’t necessarily result in a tax break.
Increased Standard Deduction Helps or Hurts Depending on Your Circumstances
Under the TCJA for 2018, standard deductions are:
• $24,000 for married joint-filing couples (up from $12,700 for 2017)
• $18,000 for heads of households (up from $9,350 for 2017)
• $12,000 for singles (up from $6,350 for 2017)
Before this change, most tax payers claimed the standard deduction until they bought a home. Once they were homeowners, they itemized deductions for mortgage interest and property taxes and often had enough write-offs to save more through itemization than taking the standard deduction. With the increased standard deduction, many homeowners no longer find an advantage in itemization since the standard deduction covers their former deductions. However, for people who live in high-cost living areas and high property tax locations, the standard deduction doesn’t cover their deductions, so they still itemize. But tax savings for many have been cut dramatically compared to past years since only the excess of one’s itemized deductions over one’s allowable standard deduction actually delivers any tax-saving benefit.
The Bottom Line
There are still plenty of solid advantages to home ownership – equity building, sales profit, comfort and enjoyment, and the flexibility to alter your space as you wish. There may even still be tax advantages for your particular situation. There’s no question, however, that homeowners need to be alert to changing tax laws. Before buying, selling, or taking out a new home equity loan, be certain that you understand how the current tax laws affect your finances long-term.