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Homeowner Tax Changes

16 Tuesday Jan 2018

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The new tax law that was signed into effect at the end of 2017 will affect all taxpayers. Homeowners should familiarize themselves with the areas that could affect them which may require some planning to maximize the benefits.

Some of the things that will affect most homeowners are the following:

  • Reduces the limit on deductible mortgage debt to $750,000 for loans made after 12/14/17. Existing loans of up to $1 million are grandfathered and are not subject to the new $750,000 cap.
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  • Homeowners may refinance mortgage debts existing on 12/14/17 up to $1 million and still deduct the interest, so long as the new loan does not exceed the amount of the existing mortgage being refinanced.
  • Repeals the deduction for interest on home equity debt through 12/31/25 unless the proceeds are used to substantially improve the residence.
  • The standard deduction is now $12,000 for single individuals and $24,000 for joint returns. It is estimated that over 90% of taxpayers will elect to take the standard deduction.
  • Property taxes and other state and local taxes are limited to $10,000 as itemized deductions.
  • Moving expenses are repealed except for members of the Armed Forces.
  • Casualty losses are only allowed provided the loss is attributable to a presidentially-declared disaster.

The capital gains exclusion applying to principal residences remains unchanged. Single taxpayers are entitled to $250,000 and married taxpayers filing jointly up to $500,000 of capital gain for homes that they owned and occupied as principal residences for two out of the previous five years.

Not addressed in the new tax law, the Mortgage Forgiveness Relief Act of 2007 expired on 12/31/16. This temporary law limited exclusion of income for discharged home mortgage debt for principal homeowners who went through foreclosure, short sale or other mortgage forgiveness. Debt forgiven is considered income and even though the taxpayer may not be obligated for the debt, they would have to recognize the forgiven debt as income.

These changes could affect a taxpayers’ position and should be discussed with their tax advisor.

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Reducing Interest Expense

07 Wednesday Jan 2015

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0% financing has induced car buyers into taking the plunge because it doesn’t cost anything to use someone else’s money.  While mortgage rates are not at zero, they’re close enough that many buyers are applying similar logic.

Qualified mortgage interest is deductible on taxpayers’ returns subject to the maximum acquisition debt of one million dollars.  For the fortunate homeowners who have paid off their mortgage, their acquisition debt was reduced to zero and only the interest on a maximum home equity debt of $100,000 is deductible.

If you have to pay interest, deductible interest is preferable because it reduces your actual cost.

Consider the following example of a taxpayer with a $500,000 debt-free home.  If they did an 80% cash-out refinance of $400,000, $100,000 would be considered home equity debt and the interest on that would be deductible on their income tax.  The other $300,000 of debt is considered personal debt and the interest is not deductible.

However, because the rates are currently so low, the loss of deductibility of the interest doesn’t have as much impact as if the rates were higher.  The key is to have a good purpose for the money that would offset the actual cost of the interest.

Paying off a higher rate debt such as credit cards, student loans, possibly, business debt could all have significantly higher interest rates.  Refinancing a home and eliminating debts like these could be a big savings.

All lenders are not the same.  Call for a recommendation of a trusted mortgage professional.