In 2017, President Donald Trump signed the largest tax overhaul Americans have seen in 31 years. Dubbed the Tax Cuts and Jobs Act (TCJA), the new law eliminates a few benefits that high-earning homeowners have previously relied on.
Only time will tell how these changes will affect the housing market overall. In the meantime, here is what you need to know about how the new tax law will affect you as a current homeowner or potential buyer:
The mortgage interest deduction is now lower
Previously, homeowners could deduct the interest on up to $1 million worth of mortgage debt. Effective for the 2018 tax year, homeowners will only be able to deduct up to $750,000 (or $375,000 if married and filing separately) for new loans. Existing mortgages will not be affected.
There is an exception: If you purchased your home before December 16, 2017 – or signed a contract that was in effect prior to December 15, 2017 – you will be grandfathered under the previous $1 million limit, as long as the purchase closed before April 1, 2018.
The home equity interest deduction has scaled back significantly
Under the former tax law, homeowners that took out a home equity loan, home equity line of credit (HELOC), or second mortgage could deduct the interest, regardless of what the funds were used for.
Not anymore – under the new law, the interest on home equity loans will no longer be deductible unless a) they are used to buy, build or improve the taxpayer’s main or second home (or qualified residence) and b) the funds do not exceed the cost of the home.
For example: If a homeowner originally took out a $600,000 mortgage for a house valued at $900,000, this taxpayer could deduct interest on a home equity loan of up to $300,000, as long as the funds are used for buying, building, or improving the taxpayer’s main or second home.
State and local tax deductions are now capped
Previously, if taxpayers itemized, they could deduct what they paid in state and local property, income and sales taxes. The new law, however, bundles both the property and sales taxes (or income taxes, whichever is higher), and caps the total deduction at $10,000.
What this means for you: If you live in a high-tax area (i.e., California, Connecticut, Maryland, New Jersey and New York), this will impact your taxes significantly, as $10,000 will most likely not cover your combined property and income taxes.
Consult with your CPA
While the new tax law has costly implications for high-earning homeowners, always consult with your CPA to determine your total tax burden. Because there are other aspects of the Tax Cuts and Jobs Act that may benefit you (such as the reduction in tax rates), your housing costs may be mitigated.