5 Homeownership Changes Coming Under New Tax Law

Here are five elements of the tax law that could affect homeownership, home selling and moving.

1. Mortgage interest deduction

The mortgage interest tax deduction is touted as a way to make homeownership more affordable. It cuts the federal income tax that qualifying homeowners pay by reducing their taxable income by the amount of mortgage interest they pay. Beginning in 2018, the deduction is scaled back to interest on debt up to $750,000, instead of $1 million, for people who buy homes on or after Dec. 15, 2017.

The law carves out an exception for people who were under contract to buy a home before Dec. 15, 2017, as long as they were scheduled to close by Jan. 1, 2018.

Another exception: When you refinance a mortgage, the compromise bill treats the new loan as if it were originated on the old loan’s date. 

2. Property tax deduction

The former tax law eased the pain of paying property taxes by allowing qualifying taxpayers to reduce their taxable income by the total amount of property taxes they paid. Beginning in 2018, the deduction is limited to a total of $10,000 for the cost of property taxes, and state and local.

3. Home equity deduction

On top of the mortgage interest deduction, the former tax law added a deduction for interest paid on home equity debt for reasons other than to buy, build, or substantially improve your home. So, for example, if you borrowed from a home equity line of credit to pay tuition, the interest you paid was tax-deductible.

Starting in 2018, interest paid on home equity debt can be deducted only if the money is used to buy, build or substantially improve the taxpayer’s home that secures the loan, according to the IRS. So the interest is deductible if the equity debt is used to, say, put an addition on a home. But it’s not deductible if the debt is used to pay off credit card debts or to buy a vacation home.

4. Mortgage interest deduction for second homes

You may deduct interest on mortgage debt on your primary home and a second home. The new law keeps this part of the former tax law in place, although it reduces the amount of eligible mortgage debt, as seen in item No. 1 above.

5. Moving expenses

Under the former tax law, you could deduct some moving expenses when you moved for a new job. You had to meet complex criteria involving distance and timing of the move.

Beginning in 2018, only active-duty members of the armed forces will be allowed to deduct moving expenses.

Capital gain rule unchanged

When you sell a house, the capital gain is the difference between the price you paid for it and the price you sold it for. This capital gain is treated as taxable income. If you owned the house long enough, you’re allowed to exclude up to $500,000 of this capital gain as income so you don’t have to pay federal income tax on it. (The exclusion is capped at $250,000 for married taxpayers filing separately.)

The new tax law doesn’t alter the capital gain exclusion for homes. The House and Senate had voted to limit the exclusion, but they struck that language from the final bill.

Fewer taxpayers would itemize

The nonpartisan Tax Policy Center estimates that the number of itemizers will fall from about 49 million to 10 million under the new tax law.

The upshot: Under the tax law through 2017, if you’re married filing jointly and you paid $15,000 in mortgage interest and property taxes in 2017, you would itemize those deductions because they exceed the standard deduction of $12,700.

Beginning in 2018, the standard deduction for married filing jointly rises to $24,000. If you’re like the hypothetical family above, your $15,000 in mortgage interest and property taxes is less than the standard deduction. So you won’t itemize. You will use the standard deduction.

Whether you end up paying less tax or more tax depends on a wide range of factors beyond the homeownership-related deductions and exclusions discussed here. Every taxpayer is different.

Realtors raise a ruckus

The National Association of Realtors opposed increasing the standard deduction on the grounds that it would destroy or at least cripple the incentive value of the mortgage interest deduction (MID) for the great majority of current and prospective home buyers, and sap the incentive value of the property tax deduction for millions more.

NAR argued that the de-emphasis on itemized deductions would result in a plunge in home values across America in excess of 10%, and likely more in higher cost areas.

Skeptics challenged the Realtors’ assertion that giving taxpayers a bigger standard deduction would cause home prices to nosedive.