The Tax Cuts and Jobs Act that were recently signed into law is causing quite a stir in many areas, especially in that of the housing market. While this finalized version of the law is much more watered down than previous versions, there are still large changes that homeowners need to be aware of.
With the new law, renting may not be the worst option, depending on what area a person lives in. Housing costs are increasing and there is a significant lack of houses available for those that wish to buy. The tax bill does not directly affect every homeowner, but it will affect many people who would have been planning to buy or sell in the upcoming years.
Interest Deductions
A home that is purchased now and up to 2026 will be eligible for an itemized deduction of up to $750,000. Previously, the maximum was set at $1 million. Anyone that made their home purchase before December 14th in 2017 is still able to deduct up to the $1 million point. They do not lose this ability if they decide to refinance.
Under the old law, homeowners could also claim interest on $100,000 of home equity debt. That means up to $1.1 million could be deducted for interest on a mortgage.
This has completely been taken away under the new law. There will be no claims on home equity debt for 2018 taxes. After 2026, this will change again so homeowners can claim up to $100,000 of interest on their home equity debt.
The major decrease in deductions will not affect many homeowners who are purchasing houses that cost much less than the $750,000 mark. However, homeowners that are in the upper end of the market may have second thoughts about selling their homes to purchase new ones, creating a stagnant market. This means that it will be difficult to invest in upper-end properties because their owners are opting to stay in their houses.
State Deductions
Under the old law, households could claim all property taxes that were paid to state or local governments as an itemized deduction as long as they did not pay the alternative minimum tax. With this, state or local income and sales tax could be deducted as well. The new law groups these SALT taxes and has put a limit of $10,000 in deductions.
Individuals and married couples must comply with the $10,000 rule. Anyone that lives in an area that has high property tax bills is going to see a stark difference between 2017 taxes and 2018 taxes. In these areas, $10,000 goes quickly.
How This Affects Everyone
Even though some of these changes will not affect a homeowner that is purchasing a smaller, less costly home, there are ways it will change their deductions. With the new law in place, a standard deduction is up to $12,000 for an individual and $24,000 for a couple. With this increase, most standard deductions will negate the option to itemize.
Even though the first version of this law change was seen as more severe for homeowners, this version still changes a lot in terms of tax deductions. Many homeowners will be affected by this change in deductions. They will have to change the way they approach their taxes. The homeowners that could be most affected are those that are living or making a purchase in the upper-end of the market.
