The new tax law signed at the end of 2017 will affect all taxpayers. Homeowners should familiarize themselves with the areas that could impact them specifically. These items may require some planning to maximize the benefits.
Tax Changes for Homeowners
Here are some of the tax changes that will affect most homeowners:
- Reduces the limit on deductible mortgage debt to $750,000 for loans made after 12/14/17. But existing loans of up to $1 million are not subject to the new $750,000 cap.
- Homeowners may refinance mortgage debts existing on 12/14/17 up to $1 million and still deduct the interest. This applies as long as the new loan does not exceed the amount of the existing mortgage they are refinancing.
- 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. Some estimates predict 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.
- You cannot deduct moving expenses unless you are a member of the Armed Forces.
- You can only deduct a casualty loss if it is attributable to a federally 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. Lenders discharge mortgage debt when you go through foreclosure, short sale or other mortgage forgiveness. The IRS sees this forgiven debt as income. So even though the taxpayer may not have to pay the debt back, they would have to recognize the forgiven debt as income.
You should discuss these changes with your tax adviser.
For a more detailed explanation of the tax changes and how they might affect you, take a look at this guide to the 2018 tax changes published by The Motley Fool.