New tax laws went into effect one year ago on January 1, 2018 and there’s a lot to unpack as you prepare your tax returns by April 15, 2019. Homeownership remains a beneficial choice financially, but changes to tax rates, deductions and credits will impact everyone’s overall tax obligation. With some changes to popular incentives for homeownership, the negative impact was largely reduced and many advantages remained unchanged from prior law. Just how all of the changes signed into law through the “Tax Cuts and Jobs Act” affect each American citizen will not be fully determined until taxes are filed in 2019 for the previous year.
Here are the main highlights for current and future homeowners:
Prior to the new law as stipulated in the new “TCJA,” homeowners could deduct total interest on mortgage loans up to $1,000,000. Now, interest on such loans can be deducted on a mortgage up to $750,000. Interest will not be deductible for the portion of a mortgage loan that is greater than 3/4 of a million dollars. Loans for up to $1,000,000 taken prior to 2018 will be grandfathered in and full interest will be allowed. Even refinancing or home equity improvement loan interest will be allowed if certain conditions are met.
For many, this will not be a concern, yet the median price for a home in Seattle, as of last December, was $699,000, down from last year’s peak in May. If home prices return to a upward climb, a loan for $750,000 may become typical and worth consideration for the anticipated overall cost of homeownership.
State & Local Tax Deductions
State and local tax deductions in Washington generally equate to our ability to deduct property taxes since we do not have a state income tax. With TCJA, it’s now be capped at $10,000. As we live in Seattle, our assessed value for 2018 was dramatically stepped up, increasing our annual property taxes by nearly $700 on average.
Washington State’s Legislature also passed a budget for 2018 that raises homeowner’s property taxes statewide in 2019, unrelated to the new federal tax law. The increase of $2.70 per $1000 of assessed value will supposedly better fund public schools. It’s unclear how this is built into our soon-to-be-mailed tax bills for the coming year.
Capital Gains on Principal Residence
The new 2018 tax law did not impact the current, untaxed capital gains for principal residences when sold. A single homeowner may have a tax-free gain of $250,000 and a married couple may escape with $500,000 over what was paid for the home if the homeowner lived in the property 2 of the last 5 years. You may also add in closing and improvement costs when figuring a true gain on the sale of your home. I suggest a visit with your tax advisor for a full picture of the effect to your financial bottom line.
The new standard deduction is $12,000 for a single filer and $24,000 if married filing jointly which means that the first $12,000 or $24,000 of income is not taxed. If you typically itemize deductions, it may be financially beneficial to compare tax returns – one with itemized deductions such as property taxes and mortgage loan interest, and, the other using only the standard deduction – to see which path lowers your annual tax burden. With higher standard deductions, many will not receive the full benefits they expected from homeownership.
Additional tax issues are addressed, of course, including the elimination of the personal exemption, an increase in the child tax credit, a significant tax reduction, with conditions, to 1099 and other business income as well as adjusted tax treatment for home equity loans and mortgages for second homes. Always meet with your tax professional well ahead of filing your returns to know how you may plan for tax obligations. Don’t be surprised or unprepared.
For more complete information on how the new “Tax Cuts and Jobs Act” affects homeownership, please read the detailed assessment online at the National Association of Realtors®.
Mark Jacobs, REALTOR®, SENIORS REAL ESTATE SPECIALIST®