Mortgage interest tax deduction has always been one of the best incentives of homeownership. So how does President Donald Trump’s new tax rule change all this?
If you are a current homeowner, planning to purchase, sell, or move in the near future, you need to be aware of how the new tax law will affect you.
The tax bill signed into law by US President Donald Trump on December 22, 2017 marks a new era of homeownership cost for the country’s taxpayers. The law takes effect at the start of this year.
Here’s a simplified overview of just how this new set of rules may affect you.
MORTGAGE INTEREST DEDUCTION IS LIMITED.
For homeowners carrying a mortgage, the new rule reduces the maximum amount of mortgage debt you can deduct interest on your taxes to $750,000 from $1 million for homeowners who bought their homes on or after Dec. 15, 2017. It, however, leaves out an exception for homeowners who were able to get under contract to purchase their homes before the December 15 mark, on the condition that they were able to close by the 1st of January.
If you decide to refinance your current home loan, the new mortgage will be treated as if it were originated on the original loan’s date.
DEDUCTIONS ON STATE, LOCAL TAXES LIMITED.
While the previous tax law allowed for unlimited deductions on all state and local property taxes, President Trump’s law now set a limit of up to $10,000.
HOME EQUITY DEDUCTION.
Under the previous tax rule, if you took out a home equity loan to use the proceeds of the loan for reasons other than home improvement, purchase, or construction, the interest on that loan will be considered deductible. So if you previously took out a HELOC to fund a medical emergency or to consolidate your debts, interest on that loan is considered deductible.
This is now however no longer possible with the new law, except for if the debt is used to improve the property.
MORTGAGE INTEREST DEDUCTION FOR SECOND HOMES.
The interest on a mortgage for a second home is still deductible but following the same mortgage interest deduction on a first mortgage with the cap amount now set at $750,000.
Moving can be costly. That’s why having some of your moving expense deducted from your income tax can be extra helpful in offsetting the financial exhaustion of your transfer. But while this was possible under the former tax law, President Trump’s new tax bill discontinued the privilege, except for members of the armed forces who are on active duty.
With the standard deduction increase, few homeowners are expected to itemize their deductions and even fewer will be seeing it as an incentive.
Consumers will also be weighing more on the benefits of homeownership and should be considering the tax implications of a move, especially in cities and states with high property taxes.
Homeowners approaching retirement may benefit more when they downsize or move.
The new tax rule will most likely cause:
- an increase in the number of homes for sale in areas with highly-ranked schools
- a decrease in home values within areas with high property tax rates