January 16, 2018

Update: How will the final GOP tax plan impact homeowners?

Last month, the republican tax bill was passed, and as it turns out, it will have a significant impact, both good and bad, on current and prospective homeowners. Be sure to contact a tax professional for more details, but here’s a mortgage snapshot of what you need to know about the Tax Cuts and Jobs Act:

1. The final bill reduces the limit on deductible mortgage debt to $750,000 (down from $1 million).

The limit applies to loans used to acquire a principal residence and a second home closed after Dec. 14, 2017.  Current loans of up to $1 million are grandfathered in and are not subject to the new $750,000 cap. Neither of these limits are indexed for inflation.

2. The final bill eliminates the deduction for interest on home equity debt.

The issue of deductibility on a home equity loan (HELOC) or first mortgage is not related to what kind of mortgage it is, but how the money was used. The bottom line is that acquisition debt is deductible, and non-acquisition debt is not.   Acquisition debt refers to acquiring, constructing or substantially improving any qualified residence.

3. The final bill places a combined deduction limit of $10,000 on state and local income taxes.

Again, this provision primarily affects homeowners in areas with higher home prices and property taxes and could cause bigger tax bills for those residents. Under the current tax law, there is no limit on how much state or local taxes can be deducted from your federal taxes.

4. The final bill provides a standard deduction of $12,000 for single individuals, $18,000 for heads of households and $24,000 for married couples filing jointly, which is indexed for inflation.

Because the new standard deduction is nearly doubled, fewer homeowners will find it worthwhile to itemize to their deductions. The mortgage interest tax deduction will still be important if your total itemized deductions exceed the standard deduction.

Ultimately, the Tax Cuts and Jobs Act is one of the biggest pieces of tax legislation in 31 years and is complex and detailed. If you’re a current or prospective homeowner, you need to contact a tax adviser with questions or concerns regarding how the final tax plan impacts you as an individual. Though the final legislation does impact home ownership tax incentives for some, the core benefits and goal of home ownership remain the same.