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2017-12-22 08:07:11
5 Changes Under the New Tax Law

Will the new tax law save you money or cost you money? The answer depends on a complex array of factors that touch on just about every aspect of your financial life. This article is about a subset of your finances: How the tax law will affect homeownership and mortgages.

Among other things, the tax law changes whether and how homeowners deduct mortgage interest and property taxes. Many of these revisions for individuals and families are set to expire at the end of 2025.

Here are five elements of the tax law that could affect homeownership, home selling and moving.

1. Mortgage interest deduction

The mortgage interest tax deduction is touted as a way to make homeownership more affordable. It cuts the federal income tax that qualifying homeowners pay by reducing their taxable income by the amount of mortgage interest they pay. Beginning in 2018, the deduction is scaled back to interest on debt up to $750,000, instead of $1 million, for people who buy homes on or after Dec. 15, 2017.

The law carves out an exception for people who were under contract to buy a home before Dec. 15, 2017, as long as they were scheduled to close by Jan. 1, 2018.

Another exception: When you refinance a mortgage, the compromise bill treats the new loan as if it were originated on the old loan’s date. That means the old limit of $1 million would apply.

 
No impact on your taxes
If your new mortgage is less than $750,000, this mortgage interest deduction tax change has no impact on you. The mortgage interest deduction debt cap is still higher than your new mortgage!
  

2. Property tax deduction

The former tax law eased the pain of paying property taxes by allowing qualifying taxpayers to reduce their taxable income by the total amount of property taxes they paid. Beginning in 2018, the deduction is limited to a total of $10,000 for the cost of property taxes, and state and local income taxes or sales taxes.

3. Home equity deduction

On top of the mortgage interest deduction, the former tax law added a deduction for interest paid on home equity debt “for reasons other than to buy, build, or substantially improve your home.” So, for example, if you borrowed from a home equity line of credit to pay tuition, the interest you paid was tax-deductible.

Starting in 2018, the deduction is eliminated for interest paid on home equity debt.

4. Mortgage interest deduction for second homes

You may deduct interest on mortgage debt on your primary home and a second home. The new law keeps this part of the former tax law in place, although it reduces the amount of eligible mortgage debt, as seen in item No. 1 above.

  Tax law through 2017 Tax law beginning in 2018
Mortgage interest deduction for second homes Deduct the interest you pay on mortgage debt up to $1 million ($500,000 if married filing separately) on your primary home and a second home. Deduct the interest you pay on mortgage debt up to $750,000 ($375,000 if married filing separately) on your primary home and a second home.

5. Moving expenses

Under the former tax law, you could deduct some moving expenses when you moved for a new job. You had to meet complex criteria involving distance and timing of the move.

Beginning in 2018, only active-duty members of the armed forces will be allowed to deduct moving expenses.

  Tax law through 2017 Tax law beginning in 2018
Moving expenses Deduct some moving expenses if you meet distance and time requirements. Only active duty members of the armed forces may deduct moving expenses.

Capital gain rule unchanged

When you sell a house, the capital gain is the difference between the price you paid for it and the price you sold it for. This capital gain is treated as taxable income. If you owned the house long enough, you’re allowed to exclude up to $500,000 of this capital gain as income so you don’t have to pay federal income tax on it. (The exclusion is capped at $250,000 for married taxpayers filing separately.)

The new tax law doesn’t alter the capital gain exclusion for homes. The House and Senate had voted to limit the exclusion, but they struck that language from the final bill.

  Tax law through 2017 Tax law beginning in 2018
Capital gain You must have owned the home, and used it as your primary residence, during at least two of the five years before the date of sale. You cannot have used this exclusion in the two years before the sale of the home. No change to the capital gain exclusion.

Fewer taxpayers would itemize

The nonpartisan Tax Policy Center estimates that the number of itemizers will fall from about 49 million to 10 million under the new tax law.

The upshot: Under the tax law through 2017, if you’re married filing jointly and you paid $15,000 in mortgage interest and property taxes in 2017, you would itemize those deductions because they exceed the standard deduction of $12,700.

Beginning in 2018, the standard deduction for married filing jointly rises to $24,000. If you’re like the hypothetical family above, your $15,000 in mortgage interest and property taxes is less than the standard deduction. So you won’t itemize. You will use the standard deduction.

Whether you end up paying less tax or more tax depends on a wide range of factors beyond the homeownership-related deductions and exclusions discussed here. Every taxpayer is different.

 

-- Holden Lewis

 
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