Prior to the Tax Cuts and Jobs Acts (TCJA), it was almost a given that owning a home was a great tax strategy thanks to the mortgage interest deduction and other tax benefits. After the passing of the TCJA, the decision to purchase a home requires more analysis. Several changes to the tax law indirectly impact home ownership. Here are a few things to consider:
- The standard deduction increased to $12,000 for a single person and $24,000 for a married couple filing jointly. In 2017, the standard deduction was $6,350 for a single person and $12,700 for a married couple filing jointly. This is quite a hefty increase to the standard deduction. Under the old law, mortgage interest usually allowed most taxpayers to exceed their standard deduction and meaning they could itemize. Under the TCJA, mortgage interest by itself may not help you cross the much higher standard deduction threshold.
- Mortgage interest will now only be deductible up to $750,000 of mortgage debt for any new debt incurred on or after January 1, 2018. Any mortgage interest on new debt incurred after January 1, 2018 that is greater than $750,000 will be limited. The old tax law allowed a mortgage interest deduction on up to $1 million dollars of mortgage debt plus another $100,000 for home equity debt. The TCJA also eliminated the $100,000 additional home equity indebtedness.
- State and local tax deductions (SALT) are really limited under the TCJA. Beginning January 1, 2018, this deduction category is limited to $10,000 maximum. This category covers property tax, state income tax, sales tax and other forms of personal tax (i.e. auto registration fees). If you pay high state income taxes, you may already be maxing out your SALT deduction and get little or no benefit from property taxes.
- Casualty loss deductions under the TCJA are almost eliminated, unless the property is in a disaster zone declared by the U.S. government.
- Moving expenses are also eliminated under the TCJA with a limited exception for military personnel.
Given the current boom economic climate, you may still want to purchase a home despite the above changes. It is very important, though, to consider these changes when deciding to buy or rent a primary residence, especially if there is another recession.
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Sahar T. Clancy, CPA