After weeks of negotiations between the House and the Senate, Congress finally passed tax legislation designed to lower taxes and stimulate the economy. President Trump signed the Tax Cuts and Jobs Act on Friday, December 22 – right before leaving for the Christmas holiday.
As a homeowner, did this bill leave financial presents under your tree for the next year or lumps of coal in your 2018 stocking? Let's look at the effects in greater detail.
Mortgage Interest Deduction – The final compromise dropped the upper limit on the mortgage interest deduction from $1 million in housing debt to $750,000 on homes that are purchased after December 15, 2017, unless the home was already under contract by December 15 and the sale closed by January 1, 2018. Another exception allows the original $1 million limit for refinancing an existing loan as long as the new loan is not greater than the amount refinanced. It's not hard for middle-class families in states with high home prices – such as California, with a median sale price of $458,599 – to pass the $750,000 threshold and face a huge change in available deductions. The recent Congressional budget extended the treatment of qualified mortgage insurance premiums as interest through 2017, but this deduction phases out for taxpayers with adjusted gross income of $100,000 to $110,000.
Standard Deduction – Thanks to the increase in the standard deduction to $12,000 for individuals and $24,000 for couples filing jointly, lower-income homeowners may find that it's no longer economical to itemize at all, taking the mortgage deduction out of play – especially if they have been paying on the home for many years and the overall remaining interest is reduced.
Property Tax Deduction Limitations – High-tax and high-property value states take another hit through a new $10,000 deduction limit on state and local taxes, including income and property taxes. Consider that half of the states have property tax rates of 1% or above, creating a $10,000 or greater property tax bill alone on a $1 million home. New Hampshire, Illinois, and New Jersey all have rates above 2%, thus consuming the entire deduction limit with property taxes on a $500,000 home.
The one-two punch of the mortgage interest and local tax limitations are likely to depress the home buying market in areas with high taxes and high property values, as potential buyers redefine what home affordability means to them. In turn, homeowners in these areas are likely to see slower gains in home appreciation as local market demand cools.
Home Equity Deduction – Under previous tax law, the interest paid on a home equity line of credit (HELOC) was tax deductible when the debt was incurred "for reasons other than to buy, build, or substantially improve your home." The Tax Cuts and Jobs Act has removed this tax deduction. However, experts say interest on HELOCs should still be deductible provided that homeowners use the proceeds of the loan to make home improvements, and the first mortgage balance plus the HELOC does not exceed $750,000. Consult your tax professional; perhaps the IRS will clarify this soon.
Moving Expense Deduction – The deduction for certain moving expenses associated with a new job has been limited to those in active duty in the armed forces. If you are a current homeowner, this doesn't affect you – but if you do have to move during the year and re-enter the market, this change is just one more thing to consider.
Casualty Loss Deductions – From now on, deductions for insurance casualty losses are only valid in case of a presidentially declared disaster.
It's not all grim news for homeowners. Other potential changes were scuttled during the negotiation phase, such as removing the mortgage interest deduction for second homes and changing the requirements for capital gains exclusions on a home sale.
In addition, homeowners in suburban and rural areas less affected by the mortgage interest cap and property tax deduction may find home prices rising in their area. Prospective homebuyers that will be priced out of urban markets may move outward to seek affordability, increasing demand and raising the value of existing homes.
If you came out ahead on the tax bill with respect to housing – or any other aspect of the bill – congratulations! If not, don't worry. Since 2018 is an election year, we wouldn't be at all surprised to see beneficial tweaks in the tax law via new legislation. Remember that while taxes may be permanent, the size and distribution is always changing.
MoneyTips is happy to help you get free mortgage and refinance quotes from top lenders.
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