The Tax Cuts and Jobs Act was signed into law in December, 2017. This new bill amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals as well as businesses. Some of the changes have already taken place and will continue through 2018. As a homeowner or home buyer, here is what you can expect from the bill and ways it may impact you.
Mortgage Interest
- If you purchased a house before December 16, 2017, you will be allowed an itemized deduction for the mortgage interest you pay up to $1 million.
- For purchases after December 16, 2017, that cap is lowered to $750,000.
- Refinancing of “grandfathered mortgages” that were acquired prior to December 16, 2017, can retain the deduction limits, but not beyond the original mortgage’s term/amount (some exceptions apply for “balloon payment” mortgages).
Second Homes
- An itemized deduction can be made for a principal and second residence mortgage up to a combined total of $750,000 (or up to $1 million if grandfathered prior to December 16, 2017).
- This means that the interest you pay on your loan for a second home mortgage, if the above loan limits are exceeded, will not be deductible in 2018.
- However, if you rent your vacation home, you can write off the costs associated with that activity, which would include a portion of mortgage interest and property taxes.
Home-equity Debt
- Interest paid on home-equity loans will no longer be deductible beginning in 2018. Therefore, 2017 will be the last year for a while to be able to deduct this interest.
- However, interest may be deductible on home equity loans (or second mortgages) if the proceeds are used to acquire or substantially improve the residence and can be documented. Talk with your tax advisor.
Exclusion of Gain on Sale of a Principal Residence
- The final bill retains current law. Therefore, Taxpayers will continue to be able to exclude up to $500,000 ($250,000 for single filers) from capital gains taxation when they sell their home, as long as they have lived there for two of the previous five years.
Property taxes
- Property, state and local income taxes face a combined $10,000 deduction limit.
- Note: The tax bill also specifically precludes the deduction of 2018 state and local income taxes prepaid in 2017.
Mortgage Credit Certificates (MCCs)
- The final bill retains current law.
Depending on how you fit into the above categories, you and your tax advisor can determine whether you will see a difference from a financial standpoint if you’re a homeowner.
Is it Still a Good Time to Buy a Home?
If you don’t already own a home, you may be wondering what these tax changes mean for your future purchasing plans. There are always several factors to consider when you are deciding whether to rent or buy. Purchasing a home is still an investment opportunity and a chance to take pride in owning a house that you can truly make your own. Your dream home may be waiting for you right now!
As always, our knowledgeable and helpful loan advisors are ready to help you determine what type of loan might be right for your situation and to help you get started on your homeownership journey!
Disclaimer: This material is for informational purposes only. This material does not provide individually tailored investment advice or offer legal, tax, regulatory or accounting advice. We recommend you contact your financial planner or tax advisor for details and more information.