Mortgage Interest Deductions
Tax-paying homeowners will recall their mortgage company issues a statement every January showing how much interest has been paid against their loan. Anyone with a mortgage knows the accruing interest payments are much higher than principal payments, especially in the first few years of paying the loan. It’s a great deduction, and it offsets costs to make the dream of homeownership more achievable for many Americans.
Changes made to mortgage interest and property tax deductions under the new tax bill impact existing homeowners with mortgages over $1 million and anyone looking to purchase a first or second home until 2026 with a total mortgage debt that’s more than $750,000. In order to be fully deductible, the mortgage(s) held by the taxpayer must be under $750,000.
Homebuyers may want to consult with a professional to determine if it’s a good time to buy a home. In certain circumstances, it may make sense to continue renting. National Association of REALTORS® reports“Congressional estimates indicate that only five to eight percent of filers will now be eligible to claim [full mortgage interest and property tax deductions] by itemizing, meaning there will be no tax differential between renting and owning for more than 90 percent of taxpayers.”
What Can You Do?
- If your mortgage is under $750,000 (or $1 million, if you purchased your home before mid-December 2017), these changes won’t impact you. Continue to review your mortgage interest deduction statement with your tax professional.
- If you’re looking to buy a second home, keep in mind that your total mortgage debt will need to be less than $750,000.
- Consider staying in a home you already own and pursue other upgrades. Note that moving expenses are no longer deductible, either.
- Limit the size of your total mortgage debt to $750,000 by increasing your downpayment at the time of purchase or purchasing a less expensive home.
- Make extra mortgage payments against the principal to counteract the accruing interest.
Home Equity Loan Deductions
Home equity loans and home equity lines of credit (HELOC) or second mortgages are commonly used by homeowners looking to remodel their home. The new tax bill eliminates the deduction for interest paid on existing home equity debt through 2025 and are only considered deductible when proceeds are used to upgrade a residence. What’s the difference between being able to deduct and not being eligible? If you’re using your loan to buy appliances, the interest is not eligible for deduction. If you’re installing a new patio, the interest is eligible since it increases the value of your home.
- Home equity loans are an affordable way to make home improvements. If you qualify, the interest rates are typically below a personal loan or credit card payment.
- Consider DIY alternatives to reduce costs on products.
- Plan for a larger downpayment before starting new projects to reduce the size of your loan.
You’ll still be able to deduct property taxes in 2018 – including state and local taxes – but the big change is that your maximum tax deduction can only be up to $10,000. This means, if you were previously filing your taxes with individual deductions for state taxes, local taxes and sales taxes, the total amount you can deduct is now capped at $10,000.
How Does This Affect You?
- For homeowners in high-tax areas around the country, state and local taxes commonly exceed $10,000. You won’t be able to claim it in entirety, so take the benefits of renting versus buying into consideration.
- Unless your state, local, and sales taxes are less than $10,000, you won’t be able to claim them in full.
- The new law is the same whether you’re filing as single or married.
- Look for houses in neighborhoods with lower taxes if possible. Note that moving expenses are no longer deductible.
- Petition your local town or city, and look for other ways to reduce local taxes that will benefit homeowners in high-tax areas.
Depreciation on Non-Residential Properties or Rental Properties
Deduction rules will stay the same for those who have nonresidential properties, including rental properties or dwelling properties. Depreciation recovery on such properties remains at 39 years for nonresidential property, 27.5 years for rental property and 15 years for qualified improvements such as restaurant, leasehold and retail spaces.