Dec. 26, 2017.
Before Christmas, President Trump signed the bill to enact the most significant tax overhaul since President Reagan was in office in 1986. President Trump, in what he called a “rushed job,” was eager to sign the legislation before the holidays. Now, life may change for some Americans — and potentially for homeowners.
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How will the tax bill impact homeowners?
President Trump signed his “incredible Christmas gift” to Americans before the holiday weekend, but the tax code overhaul and tax cuts won’t go into effect until January 1, 2018. Tax experts are currently encouraging the public to do what they can to reduce their taxes for 2017 before the year is over — by taking advantage of deductions they might otherwise miss. These “under the wire” tax deductions for 2017 may include charitable giving, paying for business supplies and expenses, delaying income, and prepaying property taxes — which we’ll discuss below.
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The tax bill is bringing changes in the upcoming year and will impact homeowners in at least three different ways:
1. Combined state, local, and property tax deductions will be capped at $10,000.
If you’re a homeowner, this may be an eleventh-hour tax-deduction opportunity you can benefit from. Tax professionals are suggesting that homeowners prepay property taxes for 2018 before December 31, 2017, if possible, to cash in on the deduction before property taxes are capped.
In the days before the new year, many homeowners have flocked to pay their property taxes in a rush that mimics Black Friday. However, the IRS still has to rule if these last-minute deductions will be allowed. Note that prepaying property taxes for the upcoming year forfeits the right to contest your property valuation.
2. The mortgage interest deduction limit for primary residences will drop to $750,000.
After the tax bill goes into effect, mortgage interest deductions will be reduced by the IRS. Before the new bill, homeowners could deduct interest on up to $1 million of property debt. In the 2018 tax year, home loan interest deductions will be limited to $750,000 of mortgage indebtedness. As a silver lining, anyone who took out a mortgage before December 15, 2017, will be grandfathered in to the previous year’s tax plan and will still be able to deduct interest on up to $1 million of home loan debt. This drops the amount of U.S. homes that can use the deduction from 44 to 14.4 percent.
“The new tax reform will have an impact,” Marc Laird, CEO of Cornerstone Home Lending, Inc., says. “But from the initial outlook, the tax change will have very little impact on most homeowners in non-high cost or high-tax states. First-time homebuyers will still be able to deduct the taxes, with a majority falling under the threshold.”
3. Vacation and second home interest will no longer be deductible.
Real estate professionals believe that eliminating the second home mortgage interest deduction will likely affect the market for second and vacation homes. However, for homeowners interested in purchasing an investment property, it’s still possible. As long as you can afford it and can incur the extra expenses. Tax deductions help. But they’re not likely to make or break the ability to afford a second mortgage for those who qualify.
The home equity loan interest deduction has also been eliminated.
Good news for homeowners: We’re lending (and ready to answer your mortgage questions) in 40 states.
What should homeowners and potential buyers do next?
Understanding these changes to tax deductions puts you back in the driver’s seat:
To the prospective homebuyer. If homeownership was in your plans for 2018, don’t let it get away. Laird says, “Too often, we look at major purchases based on financing. Zero-down and no payments for two months gets you a car you really did not need.” Keep in mind that tax reform is a constant, Laird explains. Homeownership is the start of something long-term.
“There will still be some level of tax benefit for purchasing a home. So don’t pay your landlord’s mortgage. Pay your own,” he says. Laird suggests that his clients maintain the goal of buying a home in 2018 now that the outlook on the tax reform is clearer. Doing your homework, buying within your means, and saving for a down payment are all sound and successful ways to approach buying a house.
To the homeowner. Depending on your unique financial situation, the tax reform may have more or less of an effect on your household. The best way to get your mortgage questions answered is by talking with your loan officer first. Give us a call, pay us a visit, or send an email, and we’ll walk you through your mortgage concerns each step of the way.
For educational purposes only. Please contact your qualified professional for specific guidance.
Sources are deemed reliable but not guaranteed.