Here’s a quick recap of three things to note regarding the recent Tax Cuts and Jobs Act from Washington and what it means for homeowner benefits.
1. Mortgage Interest
Today borrowers can deduct interest paid on a mortgage amount up to $1 million. The bill limits the amount of interest paid on a mortgage amount up to $750,000 for new loans after December 15, 2017. So how does this play out mathematically?
For example, if you have a $500,000 30-year fixed mortgage with a 3.75% interest rate, you’re paying about $18,750 per year in interest, and you could subtract the $18,750 from your taxable income and pay tax on the new lower amount of income.
Alternatively, if you were to obtain a new $850,000 30-year fixed mortgage with a 3.75% interest rate, you’re paying about $31,875 per year in interest. With the new bill, you could only subtract $28,125, since that would be the amount of interest you’d pay for the same loan, but maxed at the new cap of $750,000.
In higher cost areas where larger loan amounts are more common, this change in the mortgage interest deductions may make it easier to opt out from itemizing. With the standard deduction increasing to $12,000 for individuals and $24,000 for married couples, many homeowners may find it is more beneficial to use the standard deduction amount instead of itemizing amounts paid on mortgage interest.
2. Property Taxes
Today homeowners get to deduct all property taxes they pay when filing their taxes each year. The bill caps this deduction at $10,000. Let’s pretend you put 20% down when you got the $500,000 loan in the example above. This means you bought the home for $625,000, making your estimated annual taxes about $7,812. In this scenario, you’d still get to deduct the full $7,812 (since it’s less than $10,000). For homes in higher priced markets, the cap of $10,000 will remain, so if you’re concerned about what this means if you buy a home, contact a loan advisor to help you analyze your options.
3. Capital Gains
Today homeowners are exempt from paying capital gains taxes on gains up to $250,000 (or up to $500,000 for married couples) when selling a primary residence. If you lived in the home two of the last five years, this means you’d pocket home appreciation up to $250,000 (or up to $500,000 if you’re married) tax free when you sold your home and then pay capital gains taxes on any appreciation above this amount—the calculation is a bit more complex, but this is the gist. Earlier tax reform proposals would have increased the threshold, but this bill keeps the two year minimum so many homeowners who may want to sell can still receive this benefit.
It’s important to note that the president will still need to approve the final version of the bill this week, so nothing is final as of yet. However, when it comes to taxes and individual homeowner benefits, there are many items to consider and each person’s financial situation is different.
If you have specific questions about what this means for you and the impact on buying, selling or refinancing, contact a trusted loan advisor to discuss.