February 2nd, 2018 8:24 AM by Jackie A. Graves, President
Under the recently passed tax legislation, many homeowners are
left wondering how the longstanding federal tax benefits of homeownership will
affect them. These changes are in effect as of January 1, 2018, so
homeowners won’t see the impact until they file their 2018 taxes in the spring
of 2019. But with tax season upon us, this new tax legislation is on many
sum, the new rules can be seen as less preferential towards homeowners. Changes
to the tax law now reduce the amount mortgage interest, state and local income,
sales and property taxes, and interest from home equity lines of credit
(HELOCs) that you can deduct, if at all.
of the biggest changes in the new tax law includes the home mortgage interest deduction (MID),
which allows taxpayers to deduct from their annual income the interest that
they paid during the year on a mortgage. This is applicable to a first or
second home. But this new tax law means different standards moving forward.
homeowners were able to deduct all local taxes paid in a given year and were able
to deduct the interest paid on mortgage debt up to $1 million. Under the new
law, however, that amount of mortgage debt you can deduct is reduced from $1
million to $750,000 for any home closed after December 15, 2017.
Additionally, state and local income, sales and property taxes are now
deductible up to only a combined $10,000. This change may not affect homeowners
in less expensive markets with lower tax burdens, but it will likely make a
difference to homeowners in more expensive, higher taxed areas.
deductions for homeowners are further reduced by the doubling of the standard
deduction, which decreases the number of households that itemizes their
deductions. The new tax law increases the standard deduction to $12,000 for
single filers and $24,000 for joint filers from $6,350 and $12,700,
respectively. For many homeowners, it no longer makes sense to itemize
the old tax law, roughly 44 percent of U.S. homes were worth enough for it to
make sense for a homeowner to itemize their deductions and take advantage of
the mortgage interest deduction. However, under the new legislation, only 14.4 percent of homes
would be worth enough.
now, more households will be more likely to maximize their tax breaks with a
standard deduction rather than with individual, itemized deductions,
essentially removing the incentivize to spend more on a home in hopes of
recouping some of those costs later on.
the past, homeowners have been able to use their home equity to get low,
tax-deductible interest rates on large purchases. For instance, homeowners
could take out a home equity line of credit (HELOC) to renovate their kitchen
or pay off higher interest debt.
by taking out a HELOC, you were able to have a lower interest rate and also be
able to deduct up to $100,000 in the interest you pay on that line of credit
from your taxes. But this cheaper financing may be a thing of the past under
the new tax bill as that loophole has been mostly closed.
homeowners can only deduct interest on HELOCs if they meet two things: first,
if the money is used to pay for home improvements and second, the combined
total of your first mortgage balance and HELOC don’t exceed $750,000—the new
limit on mortgage amounts qualified for interest deductions, which is down from
the previous $1.1 million.
good news is many people across the nation use HELOCs for the purpose of making
home repairs. According to the Zillow Consumer Housing Trends Report
2017, with 21 percent of homeowners take advantage of a HELOC. And
of those who tapped into their home equity in the past two years, 55 percent
did so to pay for improvements to their home.
you were planning on taking out a HELOC to pay for something other than home
improvements, or if the new tax rules make a HELOC less favorable to you, it
might be worth looking to a cash-out refinance instead. Read more about the
differences between HELOCs and cash-out refinance here. You can also talk to a mortgage professional to discuss
your particular situation to see what’s best for you.
and buyers should keep in mind the implications of the new tax law as it
applies to ownership. For some homeowners, the increased standard deduction may
be beneficial. But for others, what might have made sense for you and your
family before may no longer be applicable. Stay on top of what these news rules
mean for you. If you have more questions about what the new tax code means for
you, take a deeper dive into our research blog to get
your questions answered.
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