One of the hallmarks of the U.S. tax system has always been a set of lucrative incentives for home ownership. But of course, with the recent passage of the Tax Cuts and Jobs Act (TCJA), there have been some major changes.
The bottom line: The benefits are not as great.
According to data from Zillow Group, Inc. (NASDAQ:Z), there are 77.2 million homeowners in the U.S. What’s more, based on research from the Tax Policy Center, the number of households expected to claim itemized deductions is forecasted to plunge from 37 million to 16 million this year! The law is also likely to reduce charitable giving by up to 55.
So yes, the new tax law is going to mean big-time changes.
But there are some silver linings. Consider that the tax bill has nearly doubled the standard deduction. This could actually be more beneficial for some homeowners. But on the other hand, for those people who own homes where real estate prices are high — say in California or New York — there will likely be quite a bit of pain and discomfort.
So let’s take a look at the changes — and how they may impact your situation:
#1 – Mortgage Interest
Old Tax Law: You can deduct interest on a mortgage — for your primary home and second home — for up to a total of $1 million in debt ($500,000 if you file separately).
New Tax Law: You can deduct interest on a mortgage — for your primary home and second home — for up to a total of $750,000 in debt ($375,000 if you file separately).
Yet there is an important wrinkle. If you purchased your home before December 15, 2017, then the requirements of the old tax law will apply. Although, if you refinance the loan, then the new $750,000 limit will come into effect.
Keep in mind that the tax law change could make it less attractive to buy a vacation home. But one approach could be to make it a rental. This allows for more lucrative deductions (but it’s complicated — so I recommend getting the help of a tax advisor).
#2 – Home Equity Loans
Old Tax Law: You can deduct interest on up to $100,000 of a home equity loan ($50,000 if you file separately). This is a loan where the money is “for reasons other than to buy, build, or substantially improve your home.”
New Tax Law: You cannot deduct interest on home equity debt. This also is for any such loan you agreed to prior to the enactment of the new tax law.
The new requirement could be a shock to large number of people. Let’s face it, a person’s home can be a nice source of cash. And the interest rates tend to be higher. So the loss of the deduction could have a major impact.
#3 – Deduction of State and Property Taxes
Old Tax Law: You get a full deduction for SALT (the state and local income and property tax).
New Tax Law: The deduction is limited to $10,000 ($5,000 if you file separately). Yet some states are considering creative options to lessen the impact, such as by treating property taxes as charitable deductions or requiring state taxes be taken as payroll deductions.
#4 – Moving Expenses
Old Tax Law: You can deduct moving expenses (such as for a new job), based on requirements like distance and time.
New Tax Law: There is no deduction for moving expenses unless you are active-duty military.
#5 – Sale of Your Home
Note that Congress did not make any changes to its rule on the exclusion of capital gains on the sale of a home (the difference of the value of the home sale minus the amount you paid for it, which may include adjustments).
That is, there is no tax owed for up to $500,000 for those who file jointly and $250,000 for single filers. This only applies if you have lived in the residence for two of the past five years.
Tom Taulli is an Enrolled Agent and also operates PathwayTax.com, which is a tax advisory and preperation firm. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.