Before the tax reforms, buying a home was nearly always a good investment, especially in light of the significant tax breaks. But now many of those tax breaks are either not there at all or far less significant. Many American homeowners have seen and will see impactful changes at tax time. When it comes to taxes and tax breaks, both buyers and sellers are, in many ways, playing a new game. Let’s see, then, how Floresville homeowners can capitalize from the new tax laws.
Don’t Buy Too Much Home
One of the new tax laws that will affect homeowners is the change in the standard deduction. Formerly, according to tax experts, the standard deduction “would have been $6,500 for individuals, $9,550 for head of households (HOH), and $13,000 for married filing jointly (MFJ). Now, the standard deduction amounts are$12,000 for individuals, $18,000 for HOH, and $24,000 for MFJ.”
The thing to keep in mind is that mortgage interest and property taxes are deductible only if you itemize on the Schedule A, and this is typically done only if the itemized deductions are greater than the standard deduction. But with the new tax laws, that difference may change for many people. And those people who bought more home expecting to get a break on the itemized deductions may be in for a surprise.
So the takeaway here for Floresville and any homeowner to capitalize from the new tax laws is to be more conservative in choosing a house. For the “boost in standard deduction serves as an equalizer and means that the extra cash outlay [for more home] won’t necessarily result in a tax break.”
Be Aware of Mortgage and Equity Debt Interest Caps
Prior to the tax reform and new tax laws, people who itemized deductions “could deduct qualifying mortgage interest for home purchases of up to $1,000,000 plus an additional $100,000 of equity debt. The $1,000,000 cap applied to a mortgage on your primary residence plus one other home.” Now, however, the cap is $750,000 for mortgage interest deductions.
This aspect of the new tax laws will impact people who bought homes of higher value in hopes of capitalizing on the interest deduction, but who now can’t deduct as much owing to the new cap. Also, homeowners with homes with a value near that cap may find it harder to sell in coming years, so now may be the best time to sell.
Consider Local and State Taxes
Those who itemize can still take deductions for local and state income and sales taxes, as well as property taxes. Although these deductions are still in place, the new tax laws dictate a new total amount for all Schedule A local and state taxes – $10,000 and $5,000 for married taxpayers who file separately. And, formerly, this was one of the largest deductions for many people.
Some states (Texas and California, for instance) have high property taxes. If you live in one of these states, you need to be aware of and take advantage of efforts to re-characterize tax payments as a way to have a portion of them characterized as a species of charitable donation. The IRS has plans to issue guidance on this matter.
Beware of Refinancing That Isn’t for Improvement
As we mentioned, before the new tax laws, you could deduct mortgage interest plus a further $100,000 for home equity debt. But much of that has been done away with. Now, you can deduct equity debt only if the refinancing is related to improving your home – not if, for example, you refinanced in order to make a large purchase like a boat or a child’s college education.
According to the new law, interest on home equity loans and lines of credit can be deducted only when “they are used to buy, build or substantially improve the taxpayer’s home that secures the loan.” So the trick here, if you want to deduct the interest and capitalize from the new tax laws is to make sure that home equity loan is used for home improvement. So if you want that new patio or those new windows that is when it would be tax deductible.
Be Cautious About PMI
Typically, buyers who can’t come up with a standard down payment are required to pay for private mortgage insurance (PMI). In the past, in an effort to revive a sagging housing market, buyers were allowed a tax deduction for the cost of PMI, with the premiums, rolled into the deductible mortgage interest. But this deduction was not renewed for 2018.
If you are struggling to come up with a 20% down payment, you may want to hold off on buying till you can accumulate a larger down payment. Now that you can’t deduct the PMI premiums, it may be better to wait and avoid the PMI altogether.
Most people do pay PMI and then maybe refinance when they have gained 20% equity in their home. That gain may be faster than trying to save 20% for the down payment. You are living in the house, enjoying it while it gains value.
Get the Agent Edge
These new tax laws are going to be a game changer for many sellers and buyers. It will pay, then, to know how Floresville and any homeowner can capitalize from the new tax laws. Your local agent may not be a financial advisor, but she does know exactly what is going on in your local real estate market. And with all the changes taking place, that is some guidance you really can’t do without today.