Whether you are already a homeowner or thinking about buying your first home, the new tax laws—officially known as the Tax Cuts and Jobs Act (TCJA)—will challenge how you think about the cost of homeownership. What the TCJA should not change is the reason you choose to own a home, which is more likely to involve quality-of-life and wealth-accumulation goals rather than your tax bill.
With the passage of the TCJA, the after-tax benefit of homeownership has become less clear. While it appears to level the playing field, tax-wise, between renters and owners, the expense of renting may still exceed home owning in many markets.
Most importantly, the tax changes impact each household differently. With so many changes to many of the inputs to your tax return, whether you benefit from the changes and to what degree will be a function of where you live, how much debt you currently owe, who makes up your household, the type of debt you have, and how much you make.
To understand exactly how you are impacted by the TCJA, you will need to work through a projection with a tax professional. Until you do, here is a summary of some of the key home-related changes.
Mortgage interest remains deductible for most homeowners. The deduction is available on acquisition indebtedness – debt incurred in acquiring, constructing, or substantially improving a qualified residence – that does not exceed a total of $750,000. The previous cap on total mortgage debt of $1 million remains in effect for existing mortgage holders.
Property, state income, and local taxes, which had been deductible on your federal return, are now limited to $10,000. This is especially significant for individuals living in states with high income taxes and those in areas with high property taxes.
Interest on home equity debt, such as home equity lines of credit, may no longer be tax deductible, especially where draws against the line are used to pay expenses not related to home improvement. This takes effect for tax years beginning after December 31, 2017, and remains in effect until 2025.
Offsetting the elimination of these deductions is a jump in the standard deduction. For 2018, the standard deduction will rise to $12,000 for individual filers and $24,000 for those who are married and filing jointly. For many households, this boost could more than offset the loss in their itemized deductions and lower their overall federal tax bill, even after their home-related deductions disappear.
What You Should Do Now
Homeowners with home equity-based debt may want to meet with their Loan Officers. Depending on their circumstances, it may work to their advantage to consider a cash out refinance, while interest rates are still relatively low. This would retire their home equity loan product and take out a larger mortgage. Assuming the new mortgage does not exceed the $750,000 threshold, the interest paid would then qualify for the deduction for those still planning to itemize, assuming the benefit will exceed the cost of refinancing.
Given the degree to which the standard deduction rose, after meeting with your Loan Officer you should also discuss your circumstances with your tax professional to determine what course of action will lead to the best after-tax outcome for you.
While the experts are still sorting out the net impact to taxpayers-at-large, it is generally thought that despite the changes, many taxpayers could see a rise in their after-tax income despite the elimination of so many popular deductions. Should that be the case for you, those extra dollars could make it easier to save money toward a down payment if you are not yet a homeowner. For current homeowners, it could make renovations and repairs more affordable.
In the end, decisions around homeownership have always involved more than tax calculations. Historically, homes have helped their owners meet their growing family’s needs, improve their comfort level, and build wealth through the growth in their equity. So, in a way, by deemphasizing tax considerations, the TCJA may realign the decision to own a home of your own with its actual benefits, maximizing your quality of life, rather than your deductions.