As a homeowner, your ability to deduct mortgage interest from your tax return makes real estate one of the best investments.
The tax bill that will be in force in the up and coming tax season, the Tax Cuts and Jobs Act (TCJA), has made some dramatic changes to the tax law. Here’s a summary of the changes:
TCJA Items to Watch in 2018
When the TCJA was pushed through Congress in December 2017, many people were up in arms. The overhaul, they said, was going to be problematic for many reasons, which, we’ll see how that pans out. It does seem that when it comes to real estate, the TCJA is going to make it tough for homeowners to lower their taxes.
These are the top items you’ll want to pay close attention to this year:
Item #1: SALT
The state and local tax deduction (SALT) is set to be a problem for homeowners in high-tax areas. In the past, you could claim an unlimited amount of already-paid personal state and local income taxes, as well as your property taxes, as a deduction to offset your tax bill. From now until 2025, you’ll only be able to use your Schedule A to itemize $5,000 worth of these taxes if you’re single or married filing separately and $10,000 for married filing jointly.
This looks like an issue for many people in those high tax areas on both coasts, but for some, the increase of the standard deduction to $12,000 for singles or $24,000 for couples may balance the equation.
Item #2: Your Mortgage Interest Deduction
If your home was purchased after December 14, 2017, you will be subject to the new limits on mortgage interest deductions. Instead of being able to deduct the interest on up to a $1,000,000 mortgage, you’ll be capped at the interest on only $750,000. If you are in the less expensive parts of the country, this is probably not an issue. But, those of you living close to the coast may have to pay more.
According to a Zillow report published shortly after the TCJA passed, “Under the current setup [Pre-TCJA], roughly 44 percent of U.S. homes are worth enough for it to make sense for a homeowner to itemize their deductions and take advantage of the mortgage interest deduction. Under the new bill (as reported), that proportion of homes drops to 14.4 percent. Interest on second/vacation homes will remain deductible, but will also have a ceiling of $750,000.”
Item #3: Home Equity Loan Interest Deductions
Bad news for people who bought their home with a home equity loan. If you purchased a house with a home equity loan, you might lose your deduction this year. The TCJA says that unless your home equity loan was used for home improvements, it’s no longer allowed.
It is unclear, however, how the IRS will identify where you spend your funds, especially if the loan was 10 to 15 years.
Item #4: Gains From Home Sales Still Protected
The very beneficial home sale gain exclusion remains. You’ll still be able to exclude up to $250,000 ($500k for married filing jointly) of gain from a home you’ve owned and used as a primary residence for at least two of the last five years.
Taxes and Real Estate
Even though taxes may go up, real estate is still one of the best investments you can make due to the stability it has. Home prices continue to rise, even with the threat of fewer tax deductions.