Are you wondering how the new tax laws recently passed by Congress will affect your decision to purchase or sell your home in 2018?
The experts are still sorting out many of the complicated laws and their impact, but for now we can share what we know with one caveat, we are not tax professionals. Please consult a tax professional (we can recommend one if you like) prior to making any financial decisions.
Here are some of the changes most likely to affect residential homeowners in 2018 tax year:
Changes to the cap on amount of mortgage interest deduction: Under the new law, the maximum loan amount on which interest may be deducted is decreased to $750,000 from the current $1,000,000. This means that only interest paid on the first $750,000 in mortgage debt is deductible. Note that this change only affects new mortgage originations; it does not change the limit for mortgages already in place. The law also continues to allow interest on mortgages for first and second homes to be deducted.
The deduction for interest paid on home equity loans has been eliminated: Under the prior law, interest paid on home equity loans up to $100,000 was deductible. Under the new law, interest paid on any home equity loan is no longer deductible. This change does affect any existing home equity loans, unlike the mortgage interest cap which only takes affect for new mortgages.
Cap on state and local tax deduction: Homeowners who itemize their tax returns are now limited to a $10,000 cap on state and local taxes whether they are married or single. According to CNN Money, the average state and local tax deduction claimed by Californians is well above the cap, at $18,438, according to de Leon's office. To help ensure they can still deduct much or all of the state and local taxes they pay, de Leon has proposed letting residents make a charitable contribution to the state in exchange for a tax credit. That way, the charitable contribution would be deductible on their federal return, since the new federal tax law doesn't limit deductions for charitable gifts except in certain instances. The legality of this is still in question, but worth bringing up to your tax professional when it comes time.
Moving Expenses: are no longer deductible unless you are an active member of the Armed Forces.
Standard Deduction: Standard deduction is increasing from $6,350 to $12,000.
Here is a visual example provided by California Association of Realtors of how the tax changes would affect the cost of buying a home this year: