Everything You Need to Know About Homeownership Under New Tax Laws

We tell you all you need to know about the tax plan to help you with tax planning or buying a new home.

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Everyone’s favorite topic — tax planning. What do the new tax laws mean for homeowners, and what should we keep in mind as we consider upgrades to our home or lifestyle in 2018? We reviewed feedback from the National Association of REALTORS® and talked to tax expert David Klasing, Esq. M. S. CPA of The Tax Law Offices of David W. Klasing to help us translate the new rules into guidelines that will help you plan for the future.

Colonial exterior

Mortgage Interest Deductions

Tax-paying homeowners will recall their mortgage company issues a statement every January showing how much interest has been paid against their loan. Anyone with a mortgage knows the accruing interest payments are much higher than principal payments, especially in the first few years of paying the loan. It’s a great deduction, and it offsets costs to make the dream of homeownership more achievable for many Americans.

Changes made to mortgage interest and property tax deductions under the new tax bill impact existing homeowners with mortgages over $1 million and anyone looking to purchase a first or second home until 2026 with a total mortgage debt that's more than $750,000. In order to be fully deductible, the mortgage(s) held by the taxpayer must be under $750,000.

Homebuyers may want to consult with a professional to determine if it’s a good time to buy a home. In certain circumstances, it may make sense to continue renting. National Association of REALTORS® reports “Congressional estimates indicate that only five to eight percent of filers will now be eligible to claim [full mortgage interest and property tax deductions] by itemizing, meaning there will be no tax differential between renting and owning for more than 90 percent of taxpayers.”

House for sale


House for sale

Photo by: Michael Krinke

Michael Krinke

What Can You Do?

- If your mortgage is under $750,000 (or $1 million, if you purchased your home before mid-December 2017), these changes won’t impact you. Continue to review your mortgage interest deduction statement with your tax professional.

- If you’re looking to buy a second home, keep in mind that your total mortgage debt will need to be less than $750,000.

- Consider staying in a home you already own and pursue other upgrades. Note that moving expenses are no longer deductible, either.

- Limit the size of your total mortgage debt to $750,000 by increasing your downpayment at the time of purchase or purchasing a less expensive home.

- Make extra mortgage payments against the principal to counteract the accruing interest.

Home Equity Loan Deductions

Home equity loans and home equity lines of credit (HELOC) or second mortgages are commonly used by homeowners looking to remodel their home. The new tax bill eliminates the deduction for interest paid on existing home equity debt through 2025 and are only considered deductible when proceeds are used to upgrade a residence. What’s the difference between being able to deduct and not being eligible? If you’re using your loan to buy appliances, the interest is not eligible for deduction. If you're installing a new patio, the interest is eligible since it increases the value of your home.

What Can You Do?

Pergola Patio with Water Fountain, Hot Tub and Shower

Pergola Patio with Water Fountain, Hot Tub and Shower

Multiple water features combine on this Minnesota patio with a pergola: a water fountain, hot tub and an outdoor shower. The fountain, which has underwater lighting, and flooring are made of New York bluestone. The pergola is made of fiberglass columns, cedar timbers and wood beam rafters. The outdoor shower was added by Southview Design in the second phase.

Photo by: Troy Thies Photography

Troy Thies Photography

- Home equity loans are an affordable way to make home improvements. If you qualify, the interest rates are typically below a personal loan or credit card payment.

- Consider DIY alternatives to reduce costs on products.

- Plan for a larger down payment before starting new projects to reduce the size of your loan. 

Property Tax Deductions

You’ll still be able to deduct property taxes in 2018 – including state and local taxes – but the big change is that your maximum tax deduction can only be up to $10,000. This means, if you were previously filing your taxes with individual deductions for state taxes, local taxes and sales taxes, the total amount you can deduct is now capped at $10,000. 

How Does This Affect You?

- For homeowners in high-tax areas around the country, state and local taxes commonly exceed $10,000. You won’t be able to claim it in entirety, so take the benefits of renting versus buying into consideration.

- Unless your state, local, and sales taxes are less than $10,000, you won’t be able to claim them in full. 

- The new law is the same whether you’re filing as single or married.

What Can You Do?

- Look for houses in neighborhoods with lower taxes if possible. Note that moving expenses are no longer deductible.

- Petition your local town or city, and look for other ways to reduce local taxes that will benefit homeowners in high-tax areas.

Moving Expenses

Moving Boxes

Homeowners can no longer claim moving expenses as part of their tax deduction unless the homeowner is a member of the Armed Forces.

Depreciation on Non-Residential Properties or Rental Properties

Deduction rules will stay the same for those who have nonresidential properties, including rental properties or dwelling properties. Depreciation recovery on such properties remains at 39 years for nonresidential property, 27.5 years for rental property and 15 years for qualified improvements such as restaurant, leasehold and retail spaces.

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