The New Tax Law and Homeowners

What Does The 2018 Income Tax Law Mean To Homeowners

Owning a home is one your largest investments. Plus owning a home can provide additional tax benefits. Those benefits changed in 2018 with the adoption of the bill formally known as the “Tax Cuts and Jobs Act.” If you own or are purchasing a home you should know how the tax law affects your real estate investment.

So, here’s the rundown of how the changes in the tax code affects homeowners starting in 2018.

Mortgage Payments

This new income tax law may impact your tax liability as a homeowner. Previously, mortgage interest was deductible for up to a million dollar loan. In addition, you could deduct an additional $100,000 home equity loan that you used for any purpose whatsoever.

For loans consummated in 2018 and later, you can only deduct interest payments on loans up to $750,000 (or $375,000 if married and file separately). If you get a home equity loan, the money must be used to improve the property otherwise it’s not deductible. Starting in 2018, interest paid on home equity debt can be deducted only if the money is used “to buy, build or substantially improve the taxpayer’s home that secures the loan.”

Example: In 2018 Joe obtains a $50,000 home equity loan from his local bank to pay for one of his children’s education expenses. The interest on home equity loan is not tax deductible. However, if Joe uses the loan to build an addition to his home, the interest on the loan is deductible.

As far as home equity loans are concerned, if you intend to use a home equity loan to buy, build, or substantially improve a home, you should be careful about how the debt is secured. Be prepared to show that the money really was used for qualified purposes. You must sign an instrument, such as a mortgage, that is filed with the county.

Grandfather Exception for refinancing: When you refinance a mortgage, the tax law treats the new loan as if it were originated on the old loan’s date. That means the old limit of $1 million would apply.

Local Taxes

Under prior law, taxpayers could deduct state and local real estate taxes they paid during the tax year, with no cap on the amount. The new law limits the deduction for all state and local taxes (income, sales, real estate, and personal property taxes) at $10,000 ($5,000 if married and file separately). The new law bundles all these so-called “SALT” taxes together and limits the deduction, in total, to $10,000 for both individuals and married couples.

Casualty loss deduction

Under prior law, taxpayers could deduct unreimbursed casualty, disaster and theft losses on their residence and personal use property. Congress has repealed this deduction, except for losses on property located in a federally declared disaster area.

PMI

For homeowners who put down less than 20% and are required to pay private mortgage insurance (PMI) no deduction is allowed for this portion of your monthly payment.

Finally, the biggest potential issue for homeowners hoping to take a tax deduction for home expenses is that the increase in the standard deduction may remove the tax benefit of paying home mortgage interest. Unless your itemized deductions exceed the higher standard deduction of $12,000 for individuals or $24,000 for married filing jointly, then you won’t itemize, and the fact that mortgage interest and local taxes may be deductible won’t benefit you.

Although the median U.S. house price has increased for 72 consecutive months as of mid-year 2018, you can expect the income tax deduction limitations may cause some headwinds to pricier homes since without the full income tax deductions, those homes could cost more to own.

This article is not intended as legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from their independent legal, accounting or tax adviser.

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