NEW TAX LEGISLATION WILL IMPACT HOMEOWNER DEDUCTIONS
The “Tax Cuts and Jobs Act” passed at the end of 2017 nearly doubles the standard deduction, so far fewer Americans are expected to itemize this year. For those who do, however, it could mean less homeowner deductions are available than in the past.
Previously, homeowners could deduct interest paid on the first $1 million of mortgage debt, but that threshold has been lowered to $750,000 for new mortgages. (Existing mortgages will not be impacted.)
Additionally, taxpayers will no longer be able to fully deduct state and local property taxes plus income or sales taxes. The new legislation restricts this deduction to $10,000. It also eliminates the deduction for moving expenses (except for members of the Armed Forces) and interest on home equity loans unless the proceeds are used to substantially improve the residence.10
It’s yet to be seen how the tax bill will impact the real estate market overall. While some economists predict a price reduction in certain markets, Republican lawmakers project the bill will increase take-home pay and stimulate the economy overall. According to Realtor.com Senior Economist Joseph Kirchner, “Some house hunters—particularly wealthy buyers—will see an increase in after-tax income, making an already tough housing market even more competitive. This increased demand could drive prices up even higher than they are already.”11
What does it mean for you? If you’re an existing homeowner, be sure to consult a tax professional if you’re concerned about the impact the new tax bill could have on you.
And if you’re planning to buy or sell this year, we can help you determine how the tax bill could affect demand in your current or target neighborhood and price range.
INTEREST RATES WILL RISE
No one knows exactly what will happen with mortgage rates this year, but the Mortgage Bankers Association anticipates the Federal Reserve will raise rates three times in 2018, with Freddie Mac’s 30-year fixed rate mortgage reaching 4.8 percent by the end of Q4, up from around 4 percent at the end of 2017.12
Kiplinger.com Economist David Payne also predicts interests rates will rise this year, with short-term rates outpacing long-term rates as the Fed aims to curb inflation in a tightening job market. He predicts the bank prime rate that home equity loans are based on will increase from 4.25 percent to 5 percent by the end of 2018. 13
What does it mean for you? If you’re in the market to buy, act now. Rising interest rates will decrease your purchasing power, so act quickly before interest rates go up. Give me a call today at (661) 979-9000 to get your home search started, or email me at [email protected].
And if you’re a current homeowner who is considering refinancing or a home equity loan, don’t wait. I can help you estimate your property’s fair market value so you’ll be prepared before contacting a lender.
With the end of the year nearing, it’s time to get all your tax options in order. With a second home, you have tax items to consider that you wouldn’t normally have with a first home.
Second home tax deductions:
1. Mortgage interest. You can deduct the interest if you itemize deductions. Your deduction might be limited if either of these is true:
a) Your mortgage is more than the fair market value (FMV) of your home.
b) The mortgages on your main home and your second home are more than:
i) $500,000 if filing single
ii) $1 million if married filing jointly
2. Real Estate taxes. Interest on a home equity loan or line of credit. This applies unless either of these is true:
a) The mortgage is more than the Fair Market Value of the home. This is without mortgages and including grandfathered debt.
b) The home-equity debt on your main home and second home is more than:
i) $50,000 if filing single
ii) $100,000 if married filing jointly
3. Renting your second home
a) You don’t have to report rental income if both of these apply:
i) You use the home as a residence.
ii) You rent it for fewer than 15 days during the year.
iii) It’s considered a residence if you or a family member uses the home for personal use for more than the greater of these:
(a) 14 days
(b) 10% of the number of days you rent the home at fair rental value
You can’t deduct expenses you can attribute to the rental. However, you can deduct interest and taxes if you itemize your deductions.
If you use the home as a residence and rent it for 15 days or more, report the rental income. You can deduct your interest and taxes as described above. You can deduct other rental expenses, including depreciation. However, you can only deduct up to the amount of the income minus the deductions for interest and taxes. Carry over any rental expenses not deductible under this rule to the next year. Then, they’ll again be subject to this limit.
If you don’t use the home as a residence, the above rules don’t apply. Report your income and expenses the same as you do for other rental property. Source: H&R Block
Stay tuned for more tax rules next week.
Contact Sonja Bush for help buying selling or renting your second home. She can be reached by phone at (661) 979-9000 or by email at [email protected]