2018 Tax Breaks for Homeowners: 3 Changes and What They Mean for You

by Jessica Sommerfield · 0 comments

homeowner tax break
Now that the 2017 tax season is out of the way (did I hear a huge sigh of relief?), it’s time to look ahead to how the Tax Cut and Jobs Act (TCJA) will change things next April. As a home owner for just over a year, I’m especially interested in how the new law impacts the tax advantages of home ownership.

When my husband and I bought our house, we viewed it as a good opportunity to build equity, lock into a fixed mortgage payment in an area with steadily increasing rental rates, and, of course, take advantage of all the home-related tax breaks and incentives we’ve been hearing about for years.

We learned that there often aren’t enough expenses to itemize (we paid less than 12 months’ worth of property taxes and mortgage interest) the first time you file as a homeowner. There are also fewer incentives than if we’d bought a house eight years ago (did anybody get the chance to cash in on the first-time home buyer’s credit?). Now, under TCJA, the tax breaks of home ownership are changing yet again.

Here’s a rundown of the changes and how they will impact those of us who are home owners or planning on taking that step this year.

tax breaks for homeowners1. The Mortgage Interest Deduction Will Be Lower, But Not Gone

Although there was talk of capping the qualifying mortgage amount at $500,000 (about half of the former $1.1 million), the final version isn’t as drastic. This year (after 12/16/17), new homeowners will only be able to deduct interest on mortgages up to $750,000, if filing jointly. This doesn’t apply to mortgages that were taken out last year or earlier though.

While this won’t affect most current homeowners or new buyers (the median home price across the US is $254,000), those who live in expensive areas — cities, especially coastal cities — may end up owing more to the IRS.

2. The Deduction for State and Local Income, Property, and Sales Tax is Capped at $10,000

This applies to everyone who owns a home, but, again, those with homes in coastal states and cities with high taxes and home values will be hit the hardest. According to ATTOM Data Solutions, 4.1 million Americans have property taxes that exceed $10,000. Some homeowners won’t be able to deduct the total amount of taxes they paid, and the standard deduction might not make up for it. Ouch.

3. Interest Deductions on Home Equity Loan and Lines of Credit are Suspended Unless You’re Making Improvements

TCJA suspends the interest deduction on home equity loans and lines of credit until 2026. But, as the IRS clarifies, you may still qualify for an interest deduction depending on what the loan is used for. For example, if you take out a home equity loan to make improvements to the home that secures the loan (and you’ve lived in it at least two of the past five years), you can deduct the interest. On the other hand, you won’t be able to deduct interest on an equity loan that’s used to consolidate debt or take a vacation.

Potential Equalizer: Lower Tax Rates and Higher Standard Deductions

If you own or purchase a moderately-priced home, you may not need to itemize your deductions this year, since the standard deduction has nearly doubled for each filing status. Because of this, it’s estimated the percentage of homeowners who itemize will drop from 44% to 14%.

For most people, these changes mean less paperwork, less hassle, and ultimately a better tax return. Unfortunately, this won’t be the case for homeowners who still need to itemize and feel the pinch of the new deduction limits.

The Overall Impact to the Housing Market

With the new deduction limits, there’s less incentive for people to buy pricey homes in expensive areas or upgrade to a more expensive house. On the bright side, this might be a good deterrent to people who are tempted to purchase more house than they can afford, anyway.

For current homeowners, there’s no sure sign that home values will drop as demand lowers, although the growth they’ve seen recently may slow.

After learning about these changes, I’m glad I purchased a sub-median-value home and probably won’t need to itemize my deductions next tax season. But everyone’s situation is different.

What about the rest of you?

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