SEVEN WAYS THE NEW TAX LAWS AFFECT HOMEOWNERS
With new tax changes having come into effect in the past year, it’s a great time to revisit how some of those changes might affect homeowners.
While everyone’s situation differs, there are six elements of the tax law that could affect both homeownership and moving. Note that some of these changes are set to expire in 2025, and some may stay in effect longer than that.
- Mortgage interest deduction covers debt up to $750,000.
The mortgage interest deduction is supposed to help with affordability, as it cuts the income tax homeowners pay. It does this by reducing taxable income by the amount of mortgage interest a homeowner pays. Prior to 2018, interest on debt up to $1,000,000 could be deducted if you are married, filing jointly (or $500,000 if you are married and filing separately).
Effective 2018, that deduction was scaled back to interest on debt up to only $750,000. Note that this applies to homes bought on or after December 15, 2017, and that $750,000 is the cap if you are married, filing jointly. If you are married and filing separately, the cap is $375,000.
There are two exceptions to note:
- If you were under contract to purchase a home before December 15, 2017 and you closed on that purchase prior to January 1, 2018, you can claim the higher interest deduction.
- When you refinance a mortgage, the tax law actually treats the new loan as if it was originated on the date of the old loan. Therefore, the older (higher) limits would apply.
- The property tax deduction is capped at $10,000.
In the past, homeowners could reduce their tax burden by deducting the total amount paid in property taxes from their income. Beginning in 2018, the deduction is limited to $10,000 for the total of property taxes, state and local income taxes, and sales taxes. If you are married, filing separately, the cap is $5,000.
- Home equity spending changes.
In previous years, taxpayers could add a deduction for interest on up to $100,000 of home equity debt (or $50,000 if married, filing separately), even if that money was used for reasons other buying, building, or improving your home.
That’s no longer the case. That deduction can no longer be taken if the home equity loan or line was used to pay off credit cards, buy a vacation home, or pay for tuition.
- Second homes get deductions trimmed (again).
Prior to the new law taking effect, you could deduct the interest you pay on mortgage debt for a second home up to $1,000,000 (or $500,00 if married, filing separately). That amount has been reduced to $750,000 (or $375,000 if married, filing separately).
- Forget about writing off moving expenses, unless you are active military
Previously, some moving expenses could be deducted – for example, if you relocated for a new job. While the criteria were somewhat complex, the deduction was available for many homeowners.
Now, only active duty members of the armed forces may deduct moving expenses.
- Itemizing may not pencil out
Itemizing expenses has become far more complicated. If you were married filing jointly in 2017 and you paid $15,000 in mortgage interest and property taxes, you likely would have itemized those deductions because they exceeded the then-standard deduction of $12,700.
It made financial sense to itemize in that situation.
Beginning in 2018, the standard deduction for married filing jointly increased to $24,000. The threshold is much higher for itemization as a result, and for many people taking the standard deduction makes more sense.
- Capital gains remain the same
This actually isn’t a change … and is something you should know if you are selling a home. The new tax laws didn’t change the capital gains exclusion for home.
What is capital gain? Simply put, it’s the difference between the price you paid for it and the price you sold it for. That “gain” is taxable income in the eyes of the IRS. In some circumstances, your gain may also be offset with the cost of improvements you made to the home (but typically not the cost of normal maintenance and some repairs).
You can exclude up to $500,000 (married filing jointly) or $250,000 (married filing separately) of the gain in certain circumstances, which means you won’t pay income tax on that excluded portion. The rules are somewhat complicated, but generally speaking you have to have owned the home for five years and used it as your primary residence for at least two of those five years. You also can’t have previously used this exclusion in the two years before you sold the home.
Tax laws are complicated, and I’m not a tax expert (I don’t even play one on TV!). If you have specific questions about tax issues and how it could affect your home ownership, please let me know. I’d be happy to refer you to a great professional!