The new tax law reduces the limit on mortgage interest deductability
There’s a new limit of $10,000 on state and local property, income and sales tax deductability
A doubling of the standard deduction might mean fewer homeowners choose to itemize
First-time homebuyers (or anyone else buying a new or existing home) face a dizzying array of questions and considerations—whatever time or place they jump into the market. Current mortgage interest rates are just one of many factors. This year, add another item to the list: How might U.S. tax law changes affect home buyers/home purchases?
American homeowners have grown accustomed to standard deductions for mortgage interest and for state and local taxes, but some of those things are different under the new law, which was approved by Congress in December and is formally known as the Tax Cut and Jobs Act. Other changes involve how withholdings, interest for home equity loans and lines of credit, and other areas are handled.
Wherever you’re shopping for a home, whether you are a first-time homebuyer or a seasoned pro, it’s critical to understand how the new tax law affects homeowners and home purchases, says Lisa Greene-Lewis, a CPA and editor of the Intuit TurboTax blog. Mortgage rates, housing prices, and supplies are among other key factors in any home purchase. Here are a few more good-to-knows.
What’s Changed With New Tax Law
There’s a cap on home mortgage interest. The new law reduces the limit on deductible mortgage debt to $750,000 for loans taken out after Dec. 14, 2017. Previously, you could deduct home mortgage interest on secured loans up to $1 million. (Note: Loans of up to $1 million taken out on or before last Dec. 14 are grandfathered in and not subject to the new $750,000 cap.)
According to the National Association of Realtors, other details related to mortgage interest include:
- Homeowners may refinance mortgage debts that existed as of Dec. 14, 2017, up to $1 million and still deduct the interest, so long as the new loan does not exceed the amount of the mortgage being refinanced.For second homes, mortgage interest remains deductible, but still subject to the $1 million/$750,000 limits.
There’s also a cap on property taxes. The new law limits the amount of state and local property, income, and sales taxes that can be deducted to $10,000 total. In the past, these taxes were generally, fully tax deductible. This is a particularly important change if you’re shopping in a location with high state and property taxes, Greene-Lewis says.
There’s a limit on the home equity interest deduction. Interest paid on a home equity loan or home equity line of credit is now limited to building or improving your home—and based on a loan of up to $100,000. You can no longer use your home equity line proceeds to pay off bills and then deduct the interest, Greene-Lewis notes.
Homeowners may have to take the standard deduction. The new law doubled the standard deduction (to $12,000 for people filing individually and $24,000 for married people filing jointly). Previously, many homeowners itemized their deductions and took additional deductions beyond mortgage interest and property taxes (such as charitable contributions); now, they may now have to just take the standard deduction if their itemized deductions are less than the standard deduction, Greene-Lewis says.
Next Steps (Whether Or Not You’re Buying)
Check your withholdings and consider adjusting. Under the new law, many people have seen their tax rates lowered by about 1% to 3%, which can mean more take-home money. Whether or not you’re in the market for buying a home, it’s a good idea to make sure the correct amount of withholding is taken out of your paycheck, Greene-Lewis says.
Greene-Lewis notes that other tax law changes (such as an increase to the child tax credit, the new dependent credit, and the elimination of dependent and personal exemptions) mean you might consider filing a new W-4 form reflecting your withholding allowances with your employer. Online tax calculators, such as the TurboTax W-4 calculator (for figuring withholding allowances) and the TurboTax TaxCaster (for estimating 2018 tax liability based on the new law), can help.
TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.
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