Mortgage Interest Deductions and More: Homeowners and the New Tax Bill
04/09/2018 Kristin Demshki
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Many Americans have been keeping an eye on the newest tax bill and thinking about how it affects their finances. However, if you own a home, or are planning to buy in the near future, you have probably paid extra attention to mortgage interest deduction reforms. The new US tax bill does include changes to this popular deduction, as well as a few other updates that may mean big changes for homeowners. Here’s what you need to know.
Part 1: Mortgage Interest Deduction Changes
If you own a home or are planning to purchase soon, the most important change brought about by the new tax plan concerns the mortgage interest deduction. Being able to write off a portion of your mortgage interest is often cited as one of the major positive features of homeownership—will you still be able to see savings under the new tax plan? Here are the details you need to know.
The mortgage interest deduction allows homeowners to deduct part of the cost of their mortgage on their taxes. The new tax plan will limit the portion of a mortgage on which you can deduct interest to $750,000, as compared to the current limit of $1 million. Homeowners with existing mortgages will be able to continue to receive the current deduction.*
Amy Jucoski is a director and national planning manager at Abbot Downing, and works with clients to provide financial and multigenerational estate planning. Here is her summary of the tax plan changes that are relevant to homeowners.
“Effective with residences purchased Dec. 15, 2017 or later, the new cap on mortgage interest deductions is $750,000 worth of new mortgage loans, including second homes. Prices for homes in prime locations can be well above this cap. Another change is the state, local and property tax deduction is now limited to $10,000 combined (used to be unlimited).
Overall, these changes can mean several things. First, location just took on a whole new meaning! Purchasing a home in a high price and high-property tax state such as New Jersey could become more expensive given the restrictions on the mortgage interest and state, local, and property tax deductions, and the elimination of most other itemized deductions under the new tax law. Second, individuals could be forced to forgo itemizing and take the standard deduction, which is now doubled ($12,000 for single taxpayers and $24,000 for married).” – Amy Jucoski
*Consult a tax adviser for further information regarding the deductibility of interest and charges.
Real estate agent Keri Shull heads one of top teams in the DC Metro area, having sold 321 homes in 2017 and more than $1 billion total in real estate. Working in an expensive market gives her insight into the type of home purchases that the new tax plan will frequently impact.
“Along with the mortgage interest deduction limits, the most notable change that will be felt by homeowners is the near doubling of standard deductions—from $6,350 to $12,000 for individuals, and from $12,700 to $24,000 for married joint filers. Additionally, the State and Local Tax (SALT) will be capped at $10,000, whereas prior there has been no cap. This could have a big impact depending on one's location!
For homeowners with more than one home, the impact will vary. If you own a home and are looking to buy a second one this year, the cap on mortgage interest rate deductions are reducing from $1 million to $750,000. However, if you already own the homes, your mortgages rates are grandfathered in and thus remain unchanged.” – Keri Shull
Part 2: Property Tax Deduction Changes
When discussing the new tax changes, most of the focus has been on the mortgage interest deduction changes. The bill has another aspect that may mean big changes for some homeowners: With the changes in property tax deductions, the new tax plan has a limit of $10,000 on the amount of state and local property taxes that can be deducted from a homeowner’s federal taxes. Will this change impact you?
Dr. Ralph DeFranco, Global Chief Economist of the Mortgage Group with Arch Capital Services Inc., leads his company's efforts to forecast regional home prices and develop predictive economic models. He is also the author of “The Housing and Mortgage Market Review,” a quarterly report on the state of the nation's housing sector. Here’s his take on what parts of the country will feel the most impact from the property tax deduction change.
“Limitations on the deductibility of state, local and property taxes mean higher taxes for many in the upper middle class. The result will be a permanent dampening effect in high-cost areas relative to the previous tax rules. The hardest hit are New York, New Jersey, Connecticut, California and Maryland. The magnitude of the impact is unclear since it depends on how many companies and people will now choose to relocate.” – Dr. Ralph DeFranco
Matthew T. Eyet, Esq. holds a Masters in Tax Law (LL.M.) from New York University School of Law. His practice focuses primarily on representing clients in tax controversy matters
“How much the new tax bill will impact you depends primarily on the amount of your current property taxes.
- If you pay less than $10,000, the new bill will likely have no impact on you as a homeowner. If you pay more than $10,000, then the impact of the new bill depends on how much you pay in state income taxes, and exactly how much your property taxes exceed $10,000.
- If your state income taxes are low (or zero), and your property taxes are not too much higher than $10,000, then the increased standard deduction will probably offset the new $10,000 cap on the state and local tax deduction.
- Conversely, if you have high state income taxes and/or high property taxes, the new bill will likely have a negative impact on you as a homeowner.” – Matthew Eyet
What About First-Time Buyers?
Existing homeowners with no plans to move or make another big change may feel less impact from the new tax changes, but will first time buyers, those relocating, and anyone wanting to upgrade or buy a vacation feel a crunch? Here are Eyet’s insights on ways that buyers can limit the effects of the changes on their new home purchases.
“For new mortgages on homes acquired after December 14, 2017, the threshold is reduced from $1 million to $750,000, which gives purchasers of pricier homes even more incentive to put as much money down as possible.
For all other mortgages, including second mortgages on your home and first mortgages on vacation homes, interest paid in 2018 and beyond is no longer deductible, regardless of whether you took the mortgage out before or after December 15, 2017.
One way to mitigate against this new rule for a mortgage on a vacation home is to rent out the vacation home for a portion of the year which will allow you to deduct a corresponding portion of your mortgage interest.” – Matthew Eyet
Wayne Winegarden, Ph.D., is a Sr. Fellow in Business & Economics at the Pacific Research Institute, as well as the Principal of Capitol Economic Advisors and a Contributing Editor for EconoSTATS. He has 20 years of business, economic, and policy experience, and offers insights on corporate strategy, public policy, and strategic planning. Beyond the tax bill changes, he reminds potential homebuyers to pay attention to interest rate changes.
“To the extent that the Federal Reserve may be raising interest rates even faster than previously thought (as reflected in the volatile moves in the stock market), there will be downward pressure on home values that will offset the impact from the tax bill.
Ultimately, the net change in price will depend upon the local market, but the key is how fast interest rates will rise. To the extent the rise is modest, slight appreciation is the likely scenario. But, should interest rates rise even faster, downward pressure on home prices will likely win out.” – Wayne Winegarden
Finally, it’s important to remember that many fears of the new tax plan may be unfounded, particularly in the real estate market. Expert real estate agent Shull wants prospective homeowners to stay positive in 2018 and beyond.
“Now is a good time to buy. The economy is strong and over 80% of taxpayers are receiving tax cuts. The new tax plan will adversely affect only a small minority of prospective homeowners.” – Keri Shull
The New Tax Bill and Your New Home
Changes to the mortgage interest deduction, property tax deductions and standard deduction limits may not be as scary as they sound. Take the time to do the math related to your unique situation and you may find that your home buying plans will continue to be a great investment.
If you are ready to buy your first home, upgrade, or even buy a second home, you can get started by contacting a PennyMac loan officer today.
The views, information, or opinions expressed in this blog do not necessarily represent those of PennyMac Loan Services, LLC and its employees.