When the new tax laws for 2018 were announced, taxpayers grew anxious about how these changes would affect them and it was difficult to sort facts from rumors and misleading media sources. Even with the Tax Cuts & Jobs Act officially in effect, many taxpayers and industry professionals admitted they didn’t fully understand the likely effects for them or their clients.
3 Important Changes to Deductions for Homeowners:
- Mortgage Interest Deduction (includes home equity and refinancing)
- Deduction Cap for Property Taxes
- Private Mortgage Insurance Deduction
While these changes might seem major for homeowners, many taxpayers are likely to overlook the marginal differences when they file their 2018 taxes compared to 2017. It’s important to understand how these three deductions have changed for current homeowners and anyone that expects to buy a home in the near future.
Mortgage Interest Deduction
The mortgage interest deduction is still in effect for both first and second homes, but moving forward in 2018 and beyond, the qualifying mortgage amount decreases from $1 million for joint filers ($500,000 for single filers) to $750,000 for joint and $375,000 for single. This applies to mortgage loan contracts that were signed before Dec. 15, 2017 for homes purchased before April 15, 2018. All mortgages prior are grandfathered in.
For taxpayers who own second homes, they can deduct their mortgage interest for second homes. However, the qualifying mortgage amount would include all mortgages together. So if you have a $500,000 mortgage for your primary and $400,000 for your second home, you can only include $750,000 in the total qualifying mortgage amount. The remaining $150,000 would not be included in that deduction.
While this has been a widely discussed with the new tax law change, most home buyers are purchasing homes worth less than $750,000. So this affects home buyers in the $750k+ market who are borrowing over $750k. While this is not as dramatic of an effect as the media has pushed it, it can create a disincentive for current homeowners to move.
Home Equity Line Interest
Previously included in the mortgage interest deduction, you could deduct up to $100,000 worth of interest on a home equity loan taken out if you were using for something other than buying, building, or improving your home. For 2018, this type of home equity deduction has not been renewed. And there is no grandfather clause so it does affect taxpayers who previously took advantage of this deduction.
And if you refinance and borrow more in the refinancing for any reason other than improving the home, then the extra funds will not be deductible.
(scroll below for information about deduction caps and private mortgage insurance)
Deduction Cap for Property Taxes
Prior to the 2018 tax reform, you could claim all property taxes paid to state and local governments as an itemized deduction. You could also deduct state and local income or sales taxes.
The new tax law bundles all of these taxes together and limits the deduction to $10,000 for both individuals and married couples. This deduction will have a significant impact on states with higher property taxes like New Jersey and New York. Oregon sits right in the middle of the property tax ranking compared to other states, so it’s important to know what to expect how this will affect you in the future.
Private Mortgage Insurance
Previously, private mortgage insurance (PMI) payments on conventional loans and the mortgage insurance premiums charged on FHA and USDA loans were included in the mortgage interest provision. The provision that included PMI in the home mortgage interest expired at the end of 2016 but was then retroactively renewed for 2017.
So far, the provision has not been renewed for the 2018 tax year. Unless the mortgage insurance provision is revisited and retroactively renewed, this can affect borrowers paying mortgage insurance and previously benefited from deducting their premiums. Since PMI is required when the borrower makes a down payment of less than 20%, any changes to deductions for private mortgage insurance payments will likely affect first-time buyers and home buyers.
Is it Time to Panic Yet? (Probably not.)
For real estate professionals and homebuyers, the changes could have had a much more impactful effect if earlier versions of the tax plan had passed. One of the earlier versions made it more difficult to exclude capital gains from the sale of a primary residence by preventing higher-income taxpayers from claiming it at all and increasing the ownership and use requirements.
While these changes can affect our Portland real estate market, most changes are not expected to significantly affect the amount of taxes owed for individuals. Many homeowners and buyers won’t be affected. It’s important to keep up with these changes so that you know what to expect to be able to deduct from your taxes in the future and how that might affect any home purchase or financing decisions.
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