The Tax Cuts and Jobs Act signed into law in December 2017 will affect you depending upon where you live and how much you pay for your home purchase. Barring new legislation, the law will revert to its prior state in 2016.
For most home buyers the new law will have little effect. It will, however, impact buyers of more expensive homes, generally over $750,000 purchase price. The new law “grand- fathers in the old rules for anyone who purchased prior to December 14, 2017.
A major change is the elimination of interest on home equity lines (called HELOC) loans. Previously, interest could be claimed on up to $100,000 of equity line debt – the loans often tapping equity for the purpose of home improvements or other emergencies.
To fully understand the impact of the legislation, we need to recognize that the standard deduction for single individuals has been increased to $12,000 ad to $24,000 for married couples. The anticipation is that most home owners will not itemize their mortgage interest amount as the standard deduction will provide a greater benefit than itemizing.
The other typically item that has been here-to-fore itemized has been state and local tax deductions (SALT). This deduction has now been limited to a total of $10,000. It is anticipated that for many, the tax limitation coupled with the mortgage interest deduction is unlikely to exceed the standard deduction amounts. Those in higher taxed states and/or who have larger mortgages are the persons who will be most adversely affected by the new law. In other words, for many couples, the increase in the standard deduction will cancel out the benefit of itemizing, since their mortgage interest and $10,000 SALT deduction combined, won’t exceed $24,000.
As we think of home purchasing today we recognize that ownership of a home in not merely a taxable advantage (even included in the standard deduction amount) but is mostly a benefit in the following ways:
- Ownership provides the ability to “make the home one’s own – decorate it, improve it.
- Ownership creates an appreciating asset as equity grows
- Ownership provides a forced savings plan – the principal portion of every payment educes the debt and creates equity
Coupled with the capital gains rules home ownership is still the most likely way for families to build wealth.