Neighbor News
New Tax Law Changes That All Homeowners Must Know
The Passage of the New Tax Law in Late 2017 Will Impact Many Homeowners and Homebuyers, Especially Those Buying Homes in Expensive Areas
The much ballyhooed new tax law, also known as, the Tax Cuts and Jobs Act (TCJA) went into effect on December 22, 2017. The new law will remain in effect from 2018-2025.
With tax season starting to ramp-up into full effect in the weeks ahead, we provide you with the changes in the 2018 tax laws that may impact existing and new homeowners, as well as, future homebuyers.
Standard Deduction Almost Doubles
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For 2018 tax year, under the new TCJA, standard deduction has nearly doubled to $12,000 ($6,350 in 2017) for singles and $24,000 ($12,700 in 2017) for married couples. Due to this significant increase in the standard deduction limits, millions of fewer homeowners will benefit from ‘itemizing’ their mortgage interest deduction on Schedule A of their tax returns. In other words, for a married couple to still benefit from ‘itemizing’ their expenses, the combined amount of their mortgage interest, state and local taxes, charitable contributions, dental and medical expenses, and tax preparation fees would have to exceed $24,000.
| Standard Deduction Limit | Old Tax Law – 2017 | TCJA Law – 2018 |
| Single Filers | $6,350 | $12,000 |
| Married Couples | $12,000 | $24,000 |
New Limit On Mortgage Interest Deduction
Purchase of First and Second Homes:
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The TCJA allows homeowners with existing mortgages originated before December 15, 2017, to continue to deduct interest on a total of $1 million of debt (also known as home acquisition debt) for a first and second home.
For homebuyers who purchased their homes after December 15, 2017, the $1 million cap on home acquisition debt goes down to a total of $750,000 for a first and second home.
Example: If prior to December 15, 2017, you had an existing $700,000 mortgage on a first home and a $300,000 mortgage on a second home, then you can continue to deduct the interest on both the homes on Schedule A of your tax returns.
However, if you had an existing $700,000 mortgage prior to December 15, 2017, and subsequently you purchased or plan to purchase a second home with a new $300,000 mortgage you could deduct interest only on $50,000 of the mortgage.
Advisory Tip: If your 2018 combined mortgage interest deduction plus other itemized deductions on your Schedule A do not exceed the new $12,000 limit for singles and $24,000 limit for married couples, then this new home mortgage interest deduction limit has no impact on you.The mortgage interest deduction will apply if you have a large mortgage and live in a high-cost area like the San Francisco Bay Area or New York.
Example: Let’s look at a simplified scenario, ignoring AMT and other income constraints. If prior to December 15, 2017, you carried one primary mortgage loan of $1,500,000, paying 4% annual interest on the loan, your total mortgage payments totaled $60,000 ($1.5 million x .04). You could deduct $40,000 [($1.0 million allowable loan limit/$1.5 million outstanding loan) x $60,000 = $40,000].
If you buy a home between 2018-2025 and take out the same $1.5 million mortgage loan at a 4% interest rate, your mortgage interest tax deduction falls down to $30,000 [($750,000 new allowable loan limit/$1.5 million outstanding loan) x $60,000 total interest paid = $30,000.
| Mortgage Interest Deduction | Old Tax Law – 2017 | TCJA Law – 2018 |
| For single filers and married couples filing jointly – On combined loan amounts on 1st and 2nd homes: | $1 million | $750,000 |
| Married filing separately | $500,000 | $375,000 |
Refinance of First and Second Homes:
On your home loan refinance, the TCJA allows you to grandfather up to $1 million of your home acquisition debt.
Example: If you had a first mortgage loan of $900,000 on December 14th, 2017, and you now decide to refinance your loan to take advantage of a lower rate or shorter term of the loan, you are able to deduct interest on the entire $900,000 loan. The new refinanced loan amount cannot exceed the amount of loan you are refinancing.
Home Equity Loans:
Under the previous tax law, interest deduction on home equity loans of up to $100,000 was allowed. The TCJA suspends deductions for interest on home-equity loans, with one exception. If you get a home equity loan for purposes of a substantial home remodel, you can still deduct the interest paid on the equity line of up to $100,000. However, if the proceeds from the equity loan are used to pay off credit card debt, or you decide to pocket the cash proceeds, then no interest deduction is allowed. The combined total of the first home mortgage and the home-equity line of credit and/or second home mortgage cannot exceed $750,000.
Advisory Tip: The TCJA rules on mortgage interest deduction generally will not affect your 2017 tax returns that will be filed in 2018.
| Home Equity Interest Deduction | Old Tax Law – 2017 | TCJA Law – 2018 |
| For single filers and married couples filing jointly – On combined loan amounts on 1st and 2nd homes: | $100,000 | Eliminated, unless the home equity loan is used to buy, build, or substantially improve your home |
| Married filing separately | $50,000 | Same as above |
New Limit On State And Local Tax (SALT) Deduction
Under the previous tax law, homeowners could claim their entire property taxes as an itemized deduction on Schedule A of their tax returns. The exception here was homeowners who were subject to the alternative minimum tax (AMT). The TCJA caps the limit of SALT deductions to $10,000 for both single filers or married couples filing jointly.
Example: If you are a single filer who owes $8,000 in state income tax and 7,000 in local property tax, under the TCJA you can only deduct $10,000 on your tax return. In 2017, you could deduct the entire $15,000, assuming that your income was not subject to the AMT.
According to the Tax Foundation, the states most affected by the new SALT deduction limit are California, New York, Maryland, New Jersey, Connecticut, and Oregon. In these states, SALT deductions are highest as a percentage of income.
| SALT Deduction | Old Tax Law – 2017 | TCJA Law – 2018 |
| Limit on your combined property, state and local income tax and sales tax that you can deduct on your tax return | No limit | $10,000 |
| Married filing separately | No limit | $5,000 |
Gain On Sale Of Primary Home Remains Unchanged
The TCJA keeps the previous law of allowing married couples filing jointly to exclude up to $500,000 gain from the sale of the primary home. For single filers, the allowable deduction of $250,000 remains in effect.
Example: If you are single and you purchased a home for $200,000 in 2000 and today you sell the home for $450,000, you can deduct the entire $250,000 capital gain from the sale of your home thanks to the allowable $250,000 exemption for single filers.
One important provision of this home seller capital gains exemption requires you to have lived in the property as your primary home for at least two of the previous five years.
| Gain on Sale of Primary Home | Old Tax Law – 2017 | TCJA Law – 2018 |
| Gain on sale of your primary home in which you have lived for at least 2 of the past five years – Single filers | $250,000 | No change |
| Married filing separately | $500,000 | No change |
We advise you to seek the expert counsel of your Certified Public Accountant or tax prepare for proper guidance on your specific tax situation.
At Reliance Financial we are committed to bringing you the latest information that may enable you to make more informed decisions when it comes to buying and/or selling your residential Real Estate. For more information or to check mortgage rates on a home loan, you can connect with one of our advisors at www.RelianceFinancial.com, email us at info@reliancefinancial.com or call us at 925-236-9501.
