How Will Homeowners Be Affected by the New Tax Code?
Ever since the recent tax legislation was passed, many homeowners have wondered how this will affect their federal tax benefits. These changes have been in effect since January of 2018, so the impact for homeowners won’t be seen until their taxes for 2018 are filed in spring of 2019. But since tax season is here, the new tax code may be a popular topic on people’s minds.
To sum it up generally, the new tax law changes will reduce the amount of mortgage interest, HELOC interest, and state and local income from sales and property taxes that you can deduct.
One of the primary changes is called the MID (or home mortgage interest deduction), allowing taxpayers to deduct the mortgage interest they paid that year from their income each year. This can apply to a first or second home, but this does mean that moving forward there will be different standards.
How Deductions Have Changed
In the past, all local taxes paid in each year could be deducted by homeowners, and they could also deduct the interest they paid on their mortgage ($1 million limit). Now, sales and property taxes are only deductible up to a combined amount of $10,000. Additionally, the limit on mortgage interest with the new law has been reduced to $750,000 from $1 million for homes that closed after Dec. 15th, 2017. In less expensive markets where the tax burden is less, homeowners might not be affected as much, but in higher-taxed areas it will make a big difference to homeowners.
Homeowners deductions are reduced even further by the standard deduction being doubled, decreasing the number of households itemizing deductions. The single filer’s standard deduction has gone up from $6,350 to $12,000 and for joint filers it has gone up from $12,700 to $24,000. As a result, many have concluded that it doesn’t make sense any more to itemize their deductions.
Under this new tax code, only 14.4% of U.S. homes will be worth enough for a homeowner to take advantage of the mortgage interest deduction by itemizing their deductions as opposed to about 44% under the previous tax law.
However, now more households are more likely to get more tax breaks with the standard deduction instead of itemized deductions. This removes the incentive to spend more on homes in an attempt to recover costs later.
HELOC Interest Deductions
Previously, homeowners could get lower interest rates that were tax-deductible on their large purchases by using their home equity. For example, they could take out a Home Equity Line of Credit (or HELOC) for the purpose of paying off some high interest debt or kitchen renovations. With a HELOC, they could get lower interest rates and could deduct up to $100,000 in interest paid on that credit line. However, this cheaper financing loophole has been discovered and addressed by the new tax legislation.
With the new tax bill, homeowners can only deduct HELOC interest under two conditions:
- If the funds are used to pay for home improvement projects
- If the combined amount of HELOC and first mortgage balance are beneath $750,000
The $750,00 amount comes from the new limit on mortgages that qualify for interest deductions. Luckily, HELOCs are primarily used across the nation for home improvement projects and repairs.
Additional Equity Options
If you were considering a HELOC to fund something that is not a home improvement project, or if the new tax code has made a HELOC less preferable, you could also consider a cash-out refinance as well. Talk to a loan officer or financial advisor to get their recommendations.