Major Tax Reform Changes Affecting HomeownersTax Planning Rentals
Are you a homeowner? Here are some big changes under the new tax law that may have affected itemized deductions on your 2018 return (and one big item that was left unchanged!):
Mortgage Interest Tax Deductions
In prior years, homeowners could deduct interest on loan amounts up to $1 million. Depending on the interest rate, the deductible amount could easily top $30,000+ in a given year. Under the new tax law, that limit has been decreased to $750,000 which can result in a substantial decrease in the amount of interest a taxpayer can deduct. The change in the mortgage interest tax deduction cap only applies to new home buyers. If you purchased your home prior to December 15, 2017, you can still deduct the interest on loan amounts up to $1million. If you are married and filing separately, you can each deduct half of the amount - $375,000 or $500,000 depending on date of purchase.
Home Equity Line of Credit (HELOC)
Many homeowners have historically used a HELOC to upgrade their homes or even pay other expenses unrelated to their property. One of the benefits of this type of loan was that interest could be written off on the homeowners’ tax return. Under the new tax law, interest on HELOCs is no longer deductible through 2025. The only exception is if the loan is being used to “buy, build or substantially improve the taxpayer’s home.” The portion of the interest related to these activities is still deductible. Second homes or vacations homes do not qualify.
Property tax deductibility is also limited under the new tax law. Previously, homeowners could deduct property tax paid in its entirety – regardless of amount or number of properties. For individuals who owned large homes or multiple homes, the total amount deducted each year for property tax could be considerable. The new tax law has limited this amount to $10,000 per year ($5,000 per spouse if married and filing separately). There are no exceptions and it doesn’t matter when you purchased the home.
Former tax regulations allowed for the deduction of moving expenses if the move was considered work related. Some limitations existed including distance of move and the amount of time worked during the first 12 or 24 months. That deduction is now completely gone except for active duty service and military members.
Capital Gains Exclusion is Still Available
Good news! One major benefit to homeownership remained untouched by the tax reform bill: the capital gains exclusion. Married taxpayers who file jointly can still exempt up to $500,000 in capital gains from the sale of their home (the amount is $250,000 for single filers or married filing separately filers). To be eligible for this exemption, the home must have been the taxpayers’ primary residence for 2 of the last 5 years (i.e. rental properties or vacation homes are not eligible). A rough calculation of your capital gains on the sale of a property is:
Sale Price – (Original Purchase Price + Improvements)
For example, if you purchased a home for $150,000 and spent $50,000 in renovations over the years you called it home, your investment in the home would be $200,000. If you sold the home for $525,000, a single filer would be able to exempt $250,000 of capital gains but would have to claim $25,000 in gains (525,000 – 250,000 = 275,000). A married couple filing jointly could exempt the entire $275,000 in gains because it falls under the $500,000 limit.
If you’re a homeowner, remember that the key to saving at tax time is good records! Make sure you retain copies of your closing statement from your original purchase and receipts for any major renovations or property improvements completed. This will help appropriately calculate your basis, or how much you’ve invested into the home, at the time you sell. Each year be sure to gather a copy of your property tax bill and 1098 (mortgage interest statement) for your tax preparer. These can amount to sizable deductions and a reduction in your tax liability. We recommend keeping all home-related records for the length of time you own the property plus seven years.
Questions about how these changes may affect you? Levesque & Associates is happy to help!