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6 Homeownership Tax Changes to Know

Feb. 21, 2019
Managing Your Mortgage, Mortgages
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You might face a fresh sense of uncertainty while preparing your tax return this year. Now that President Donald Trump’s tax plan is the law, will you save money or have to pay? The answer depends on a complex array of factors that touch on just about every aspect of your financial life. This article focuses on how the tax law affects homeownership and mortgage costs.

Among other things, the new rules change whether and how homeowners deduct mortgage interest and property taxes on their tax returns. Many of these revisions for individuals and married couples filing jointly are set to expire at the end of 2025.

Here are six elements of the tax law that could affect homeownership and moving.

1. Mortgage interest deduction covers debt up to $750,000

The mortgage interest tax deduction is touted as a way to make homeownership more affordable. It cuts the federal income tax that qualifying homeowners pay by reducing their taxable income by the amount of mortgage interest they pay. Beginning in 2018, the deduction was scaled back to interest on debt up to $750,000, instead of $1 million, for people who bought homes on or after Dec. 15, 2017.

 Tax law through 2017Tax law beginning in 2018
Mortgage interestYou may deduct the interest you pay on mortgage debt up to $1 million ($500,000 if married filing separately) on your primary home and a second home.For homes bought before Dec. 15, 2017, no change. But for homes bought Dec. 15, 2017, or later, you may deduct the interest you pay on mortgage debt up to $750,000 ($375,000 if married filing separately).

The law carves out an exception for people who were under contract to buy a home before Dec. 15, 2017, as long as they closed by Jan. 1, 2018.

Another exception: When you refinance a mortgage, the tax law treats the new loan as if it were originated on the old loan’s date. That means the old limit of $1 million would apply.

Use NerdWallet’s mortgage interest deduction calculator to find out what this means for your next mortgage.

2. Property tax deduction is capped at $10,000

Previously, homeowners were able to ease the pain of paying property taxes by reducing their taxable income by the total amount of property taxes they paid. Beginning in 2018, Trump’s tax plan limited the deduction to a total of $10,000 for the cost of property taxes, and state and local income taxes or sales taxes.

 Tax law through 2017Tax law beginning in 2018
Property taxesYou may deduct the property taxes you pay on real estate you own.You may deduct up to $10,000 ($5,000 if married filing separately) for a combination of property taxes and either state and local income taxes or sales taxes.

3. How you spend home equity funds matters

On top of the mortgage interest deduction, taxpayers in the past could add a deduction for interest paid on home equity debt “for reasons other than to buy, build, or substantially improve your home.” So if you borrowed from a home equity line of credit to pay tuition, the interest you paid was tax-deductible, for example.

Starting in 2018, interest paid on home equity debt can be deducted only if the money is used “to buy, build or substantially improve the taxpayer’s home that secures the loan,” according to the IRS. So the interest is deductible if the equity debt is used to, say, put an addition on a home. But it’s not deductible if the debt is used to pay off credit card debts or to buy a vacation home.

 Tax law through 2017Tax law beginning in 2018
Home equity debtYou may deduct interest on up to $100,000 of home equity debt ($50,000 if married filing separately). Eliminates the deduction for interest on home equity debt unless it's used to buy, build or substantially improve the home, according to the IRS.

» MORE: How much is my house worth?

4. Mortgage interest deduction trimmed for second homes

You may deduct interest on mortgage debt on your primary home and a second home. The new law kept this part of the former rules in place, although it reduced the amount of eligible mortgage debt, as seen in item No. 1 above.

 Tax law through 2017Tax law beginning in 2018
Mortgage interest deduction for second homesDeduct the interest you pay on mortgage debt up to $1 million ($500,000 if married filing separately) on your primary home and a second home.Deduct the interest you pay on mortgage debt up to $750,000 ($375,000 if married filing separately) on your primary home and a second home.

5. Only active-duty military can deduct moving expenses

Under old tax rules, you could deduct some expenses when you moved for a new job. You had to meet complex criteria involving the distance and timing of the move.

Beginning in 2018, only active-duty members of the armed forces are allowed to deduct moving expenses.

 Tax law through 2017Tax law beginning in 2018
Moving expensesDeduct some moving expenses if you meet distance and time requirements.Only active duty members of the armed forces may deduct moving expenses.

6. You may have less incentive to itemize

If you were married filing jointly and you paid $15,000 in mortgage interest and property taxes in 2017, you may have itemized those deductions because they exceeded the standard deduction of $12,700.

Beginning in 2018, the standard deduction for married filing jointly increased to $24,000. If you’re like the hypothetical family above, your $15,000 in mortgage interest and property taxes is less than the standard deduction. So you likely wouldn’t itemize and would use the standard deduction instead.

Whether you end up paying less or more in taxes depends on a wide range of factors beyond the homeownership-related deductions and exclusions. Every taxpayer is different.

Capital gain rule unchanged

The new tax law didn’t alter the capital gains exclusion for homes. When you sell a house, the capital gain is the difference between the price you paid for it and the price you sold it for. This capital gain is treated as taxable income. If you owned the house long enough, you’re allowed to exclude up to $500,000 of this capital gain as income so you don’t have to pay federal income tax on it. (The exclusion is capped at $250,000 for married taxpayers filing separately.)

 Tax law through 2017Tax law beginning in 2018
Capital gainYou must have owned the home, and used it as your primary residence, during at least two of the five years before the date of sale. You cannot have used this exclusion in the two years before the sale of the home.No change to the capital gain exclusion.

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