As 2019 begins, before long people will begin working on their 2018 income tax returns. This will be the first year that many of the provisions of the 2017 Tax Reform bill will be effective. There were substantial changes to many the provisions that impact home ownership. Following is a summary of eight changes to be aware of as the 2018 tax filing season is here.
1. Interest on Your Mortgage
There were changes to the interest deduction which are confusing.
The brief summary is that if you bought your home before December 15th, 2017, you’re entitled to deduct interest payments on up to $1 million in loans that you used for buying a home, building a home, home improvement, or purchasing a second home. However, if you made the purchase after this date the amount of interest payments are limited to loan amounts less than $750,000. This law runs until 2025, when the $1 million limit will return.
There are no differences between filing separately or jointly. However, married couples filing separately will see the overall amount cut in half.
2. Private Mortgage Insurance Deduction
Private Mortgage Insurance (PMI) premiums that were taken out after 2006 have been deductible for homeowners who have itemized deductions. This deduction expired in 2016 and was extended to 2017. After 2018, PMI premiums aren’t tax deductible any longer unless Congress allows an additional extension at the last minute.
3. The Points Deduction
Points refer the fees charged by mortgage lenders in order to get a lower interest rate. One-point equals 1% of the loan amount. Most home loans have between zero and two points. If you purchased a new home and paid points you can fully deduct this expenditure on your tax return.
If you refinanced a mortgage you can also deduct the points. However, the deduction is spread over the term of the loan rather than all in the first year.
4. Interest on Home Equity Loans
Prior to 2018, interest could be deducted on home equity loans up to a $100,000. The money could be used for anything you wanted, and you’d still get to take advantage of the deduction. For example, a homeowner could deduct interest from a home equity loan and then use it to pay for a college education or to pay down credit card debt.
That deduction has been removed from 2018 up to 2025 with one exception. Interest on a home equity loan is still available if the proceeds are used to buy, build, or improve a home/second home and the loan must also be secured by your primary or secondary home.
5. Property Tax Deduction
One of the most significant law changes is the $10,000 annual cap on how much you can deduct for state, and local taxes, which includes property taxes. Previously, there was never any cap. The cap will be in place from 2018 to 2025.
Now you can only deduct up to $10,000 from property tax, state income tax, and state/local sales taxes. There’s no index for inflation and both single and married taxpayers have the same limit.
If you have an escrow or impound account, you can’t deduct the money held for property taxes until the money is disbursed to pay the property taxes.
6. Deductions for Home Offices
If you are using part of your home for running a business on an exclusive basis then you may be able to deduct a portion of the costs, such as part of your insurance, any repair costs, and general depreciation. This can be a complex subject, so make sure you speak to a tax advisor about this.
7. Selling Costs
When you decide to sell your home, you have to consider whether there are any taxable capital gains. (There are exclusions, so you may not have to worry about this at all if the amount is low enough to fall within that zone. See item 8)
There are a variety of selling costs involved when it comes to selling your home, such as inspection fees, title insurance, real estate commissions, legal fees, and more. Every selling cost can be deducted from your total gain. The gain is the selling price minus closing costs, selling costs, and what’s known as your tax basis. Your tax basis is calculated by taking the original purchase price and adding on the cost of capital improvements minus depreciation (if any)
8. Capital Gains Exclusion?
As mentioned before, the capital gains exclusion could reduce the amount of tax you have to pay when you sell your own home. Married couples who file jointly will be able to avoid income tax on up to $500,000 in profit when they sell their primary residence (if they lived in it for two of the last five years).
Single filers can avoid income tax on up to $250,000 in profit, with the same limit applied to married couples who make the decision to file separately.
This discussion on various deductions and credits is general in nature and is not intended as tax advice. The tax laws are complex, and the application of each law will depend on your individual situation. As always, we recommend that you consult with your tax advisor regarding your individual circumstances.