Top Tax Benefits for Home Buyers

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Updated on Wednesday, January 23, 2019

The Tax Cuts and Jobs Act of 2017 launched the most significant overhaul of the U.S. tax code in three decades. With the new law placing caps on home-related and other itemized deductions, while increasing the standard deduction across filing statuses, many homeowners could see a major shift in the way they prepare their tax returns this year.

It’s a good time for a refresher course on what to expect under the new regulations, which took effect for the 2018 tax year and will remain in place through the 2025 tax year.

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Among the biggest changes for homeowners include the $10,000 cap on property-tax deductions and the elimination of many second-mortgage/home equity loan interest deductions. In turn, the standard deduction amount has increased, moving to $24,000 for joint filers (up from $12,700), $18,000 for head-of-household filers (up from $9,350) and $12,000 for single filers (up from $6,350). An additional standard deduction of $1,300 is available for elderly and blind taxpayers, a deduction that increases to $1,600 if the taxpayer’s filing status is single.

“Your overall itemizations have to be greater than the standard deduction to make it worthwhile,” said Tendayi Kapfidze, chief economist for LendingTree, which owns MagnifyMoney. “A lot of people will likely switch from itemization to just taking the standard deduction under the new tax regulations.”

And for those looking to buy in the next few years, the new tax code could make owning a home less appealing for some middle-income buyers who don’t qualify for assistance programs geared toward the lowest-income buyers. Without the ability to deduct all mortgage interest and property taxes on one’s tax return, renting might become the more affordable option.

“I think for buyers right on the margin, if you compare the cost of renting to owning, this could push them more in favor of renting for the time being,” Kapfidze said. “Without the itemized deductions, you’ll incur the full cost of the mortgage.”

Read below for a guide to the new tax law and how it can affect current homeowners and those considering buying a home in the next few years.

Mortgage interest deduction

Long touted as a benefit of homeownership, mortgage interest deductions give homeowners the opportunity to lower their taxable income by writing off the amount of interest paid on the mortgage for their primary residence and in certain cases, a second home. The ability to deduct mortgage interest is often mentioned to renters as an incentive for buying because rental payments cannot be written off and do not decrease taxable income.

Effective in tax year 2018, taxpayers can deduct interest on no more than $750,000 in qualified residence loans used to buy, construct or complete major improvements to a primary residence and a second home, if applicable. This is a decrease from the previous limit of $1 million. For married taxpayers filing separately, the new limit is $375,000, compared with the previous limit of $500,000. This regulation applies to loans taken out after Dec. 16, 2017, through the 2025 tax year; older loans are grandfathered in under the past rules.

While most homeowners won’t be affected by this shift, as the average monthly mortgage payment nationally is about $1,029, the rule change for second-mortgage loan deductions might have more impact.

Whether you can still deduct interest from home equity loans or second mortgages depends. Confusion reigned — and might still — when the new regulations were passed, as they appeared to wipe out the possibility of deducting any interest. An IRS memo in February 2018 clarified that taxpayers can deduct interest on a home equity loan, home equity line of credit, or HELOC, or second mortgage of up to $100,000 if that loan is used to “buy, build or substantially improve the taxpayer’s home that secures the loan.”

Using the IRS examples, if you take out a second mortgage to build a new deck on your home, your interest would be deductible. But, if you obtained a second mortgage to pay down personal debt or gain money for another purchase, the interest would not qualify. The grandfathering rule would apply to older home equity loans/second mortgages only if the funds were used for substantial home-related improvements.

Property-tax deduction

State and local taxes, which include property taxes, can still be deducted under the new tax code. But there are changes to the state and local taxes (SALT) deduction — under the new regulations, taxpayers are limited to $10,000 in SALT write-offs, which include the sum of real property taxes, personal property taxes and either state or local income taxes or state and local sales tax.

Homeowners in higher-tax states, which often have higher home values as well, could feel the pain on this one, as the full amount they deducted in the past could be significantly reduced. Like mortgage interest, the property-tax deduction was an itemized deduction, and more taxpayers might find that $10,000 in SALT deductions, mortgage interest and other write-offs might still be less than the new standard deduction amount — but still lower overall than the previous full total of SALT deductions, mortgage interest and other eligible write-offs.

Tax-free profits

If you make a profit from selling your home, you could exclude up to $250,000 of your capital gain from your income, or up to $500,000 if you file jointly with your spouse. Homeowners should own and have lived in the home for at least two years out of the last five prior to the sale date. You also can’t have exempted capital gains on a different home sale in the past two years.

For the joint deduction, the co-owner has to have lived in the home for at least a two-year period as well. Any sale that takes place under a year would be considered a short-term capital gain, and subject to being taxed.

In other words, the new tax law shouldn’t have much effect on your home sale. There’s also a new exemption for special circumstances — such as the death of a spouse — that gives you two years instead of one after a spouse’s death to sell a home and qualify for the full $500,000 in exemptions.

Moving expenses

Say goodbye to this deduction altogether, unless you are an active-duty member of the Armed Forces moving pursuant to a military order. Taxpayers can no longer deduct moving expenses to start a new job, while in the past, they could deduct expenses that weren’t reimbursed or prepaid by an employer.

Consider the potential change in tax-bracket status if you do accept a new job and have an employer paying for your move. Qualified moving expense reimbursements are no longer excluded from gross income and wages, and employers who pay for an employee’s move must now include those costs as part of employee income.

Other benefits

Homeowners can still take advantage of other benefits that remain unchanged by the new tax law. Those in lower income brackets could receive a state-issued Mortgage Tax Credit Certificate as part of their mortgage loan to earn up to $2,000 in tax credits per year. Unlike the mortgage interest deduction, this credit can be claimed even if you take the standardized deduction.

Mortgage insurance deductions typically have required a year-to-year renewal by Congress. The Bipartisan Budget Act of 2018, passed on Feb. 9, 2018, extended the write-off for the 2017 tax year, but no extension action has been taken at time of publication (mid-January 2019) for the 2018 tax year.

Conclusion

Most homeowners will experience changes in the way they prepare their taxes for 2018 due to the new tax-code regulations. While new mortgage-interest deduction limits shouldn’t have a significant effect on the majority of homeowners, the $10,000 cap on property-tax deductions could have a major impact.

And, with the increase in the standard deduction, it might not be worth it for many homeowners to itemize deductions at all.

As for potential homebuyers, LendingTree’s Kapfidze said that owning a home is still worth the effort in the long term, despite the lack of immediate tax benefits that made ownership more appealing than renting for many. Ironically, the loss of longstanding tax breaks across the board could indirectly encourage more Americans to buy a home for a different reason.

“It could be very beneficial if homes appreciate at a slower rate due to decreased demand and homes then become more affordable,” he said.

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