How does the Tax Cuts and Jobs Act Affect Homeowners?
Several changes took place that affect many homeowners or potential homeowners. A lot of different figures and ideas were thrown around before the official bill was ratified, so I’d like to clearly state the major changes here.
None of what I am relaying here should be considered professional tax advice and should you have questions about how this may affect your personal situation please consult a tax professional.
Mortgage Interest Deduction: The cap for mortgages for a purchase, improvement, or construction of a home was lowered from $1,000,000 to $750,000 (this is a cumulative total that applies to second homes as well). There are a couple caveats though. Firstly, any mortgage taken out prior to December 15, 2017 maintains the $1,000,000 cap. Secondly, interest deduction for home equity lines has been eliminated. This means any loans or lines of credit taken against your home for reasons other than substantially improving your home. Previously, you could deduct interest on home equity loans up to $100,000 but starting in 2018 that is removed. One option to explore is refinancing any existing home equity lines into “deduction-friendly” mortgages, as long as the amount stays under the cap – consult with your CPA.
State and Local Tax Deductions: This is now capped at $10,000 starting in the 2018 tax year. I have read that they will disallow any prepaying of state and local income taxes in 2017, but check with your tax professional if you may be able to prepay property taxes for 2018.
Exclusion of Gain on Sale of Principal Residence: This remains unchanged. If you have lived in a home as your primary residence for a combined 2 of the last 5 years (does not have to be consecutive) then any profit realized from the sale up to $250,000 for a single individual or $500,000 for a married couple is tax-free.
Will this affect the market? In my opinion, I think it will have a minimal effect on the real estate market as a whole. The majority of homeowners purchased their home for myriad reasons other than the tax benefits. For many, owning a home is an important part of raising a family, feeling independent, or building equity as opposed to renting. That being said, there is still plenty of financial incentive to own real estate both as your personal home and investment properties (especially in southern California!).