Tax season is upon us once again and to make it even more interesting this year, the tax code has changed, along with the rules about tax deductions for homeowners. Many homeowners who used to write off their property taxes and the interest they pay on their mortgage, will no longer be able to.
Standard Deduction Increased
It’s not that you can’t itemize and write off your mortgage interest or property taxes, it’s that the standard deduction, that amount everyone gets, nearly doubled under the new law. It’s now $24,000 for married, joint-filing couples (up from $13,000), and $12,000 for singles (up from $6,500).
Many more people will now get a better deal taking the standard deduction than they would with itemizing all their deductions. The Federal Government predicts the number of homeowners who will be able to deduct their mortgage interest and property taxes under the new rules will fall from around 32 million to about 14 million, that’s about a 56% drop
Single people may get more tax benefits from buying a house than a married couple as you can reach, and potentially exceed, the $12,000 standard deduction more quickly.
Personal Exemption Repealed
One caveat to the increase in the standard deduction for homeowners and non-homeowners is that the personal exemption was repealed. No longer can you exempt from your income $4,150 for each member of your household, and that might temper the benefit of a higher standard deduction, depending on your particular situation.
For example, a single person might still come out ahead. Her/His $5,500 increase in the standard deduction is more than the $4,150 lost by the personal exemption repeal.
But consider a family of four with two kids and in a 22% tax bracket. They no longer have a personal exemption of $4,150 or $16,600 total for the four of them. Although the increase in the standard deduction is worth $2,420 ($11,000 x 22%), the loss of the exemptions would cost them an extra $3,652 ($16,600 x 22%), so they lose $1,232 ($3,652 – $2,420).
So, bottom line, your household composition will affect your tax status.
Mortgage Interest Deduction
The new law caps the mortgage interest you can write off at loan amounts of no more than $750,000. However, if your loan was in place by Dec. 14, 2017, the loan is grandfathered, and the old $1 million maximum amount still applies. In Southern Oregon, most people don’t have a mortgage larger than $750,000; they won’t be affected by the cap.
But if you live in a pricey area like San Francisco, where the median housing price is well over a million bucks, or you just have a seriously expensive house, the new federal tax laws mean you’re not going to be able to write off interest paid on debt over the $750,000 cap.
State and Local Tax Deduction
The state and local taxes you pay, like income, sales, and property taxes, are still itemizable write-offs. But, for the tax year 2018, you can’t deduct more than $10,000 for all your state and local taxes combined, whether you’re single or married. (It’s $5,000 per person if you’re married but filing separately.) If you make a lot of money, this will hurt you as your deduction will be capped at $10,000 but a $10,000 cap will not affect others.
Rental Property Deduction doesn’t change
The news doesn’t change for landlords. There continue to be no limits on the amount of mortgage debt interest or state and local taxes you can write off on rental property. And you can keep writing off operating expenses like depreciation, insurance, lawn care, and utilities on Schedule E.
Home Equity Loans
You can continue to write off the interest on a home equity or second mortgage loan (if you itemize), but only if you used the proceeds to substantially better your home and only if the total, combined with your first mortgage, doesn’t go over the $750,000 cap ($1 million for loans in existence on Dec. 15, 2017). If you used proceeds to pay medical expenses, take a cruise, buy a BMW or anything other than home improvements, that interest is no longer tax deductible.
The new rules don’t grandfather in old home equity loans if the proceeds were used for something other than substantial home improvement – you can no longer deduct the interest.
The Catch
All the new tax laws take effect in January of 2018 but here is the catch, they all expire in January of 2025, so in six more years we’re back to the old tax code.
Graham Farran
Broker / Manager
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