How the New 2018 Tax Plan Impacts Homeownership
On December 22, 2017, President Trump signed the "Tax Cuts and Jobs Act." Changes will affect households differently, based on local home values and tax rates. But here is a generic breakdown of what current homeowners -- and those who are looking to buy or sell a home -- can expect:
Mortgage interest deduction
The new mortgage tax deduction rules are effective for the 2018 tax year and still apply to mortgages on both first and second homes defined as qualified residences. Under the bill, homeowners who purchased a house before Dec. 15 of 2017 will be able to continue deducting the interest they pay on mortgage debt of up to $1 million. Meaning current loans of up to $1 million are grandfathered and are not subject to the new $750,000 cap.
For purchases after that date, that cap is lowered to $750,000 — and only for the mortgage on your primary residence.
However, since most people’s home values don’t exceed $750,000, this is a measure that affects mostly expensive housing markets. To provide a bit of background data, the National Low Income Housing Coalition estimates that just 1.9 percent of mortgage originations from 2013 to 2015 exceeded $750,000 in value; California accounted for 45.7 percent of them, and New York accounted for 7.4 percent.
Home equity deduction
Another change affecting homeowners in 2018 is the elimination of interest paid on home equity debt for reasons other than to “buy, build, or substantially improve your home.” Homeowners were able to deduct interest on home equity lines of credit (HELOCs) when that money borrowed was used to pay for things like college tuition. In the past, this would allow deductions of up to $100,000 a year. This is no longer the case.
Taking a closer look at the change, Black Knight Analytics recently reported, “(with the recently passed tax reform package) interest on these lines of credit will no longer be deductible, which increases the post-tax expense of HELOCs for those who itemize.” So if you have a HELOC, you may want to look at repaying that loan sooner.
Capital gain from home sale
The final bill retains current law. A significant victory in the final bill that the National Association of Realtors (NAR), one of the nation’s largest lobbying groups, achieved. The Senate-passed bill would have changed the amount of time a homeowner must live in their home to qualify for the capital gains exclusion from two out of the past five years to five out of the past eight years. The House bill would have made this same change as well as phased out the exclusion for taxpayers with incomes above $250,000 single/$500,000 married.
Property tax deduction
In addition to the mortgage interest deduction, the bill limits the deductibility of property taxes and state and local income taxes to a combined $10,000. If you live in a high-tax area, you will be especially affected by the new limit on how much you can deduct from your federal income taxes. Who will be affected? Well, according to ATTOM Data Solutions, 4.1 million Americans nationwide pay over $10,000 in property taxes.
Taking all of this into consideration, is it still attractive to buy a home in 2018? We’re in agreement with Zillow. “At the end of the day, people choose to buy – or not buy – a home for a whole host of reasons, not just what their tax bill looks like in April.” When you’re ready to seek mortgage pre-approval and to start the journey toward homeownership, give us a call: (800) 910-4055.