It’s been a summer of change for my neighborhood. Several of our neighbors have moved, including our next-door neighbors that I really liked.
My former suburban Austinites are heading off to new jobs, other subdivisions they’ve discovered or to be closer to families across the state or country.
A few also decided it was time to cash in on the rising property values of our neighborhood. I must admit, that’s crossed my mind, but then I think moving and …
Summer is prime moving time regardless of the reasons.
Things tend to slow down at workplaces, giving you more time to take care of the
hasslesdetails of relocating. Schools are out, giving families time to get settled in new districts before the kiddos’ classes resume.
Whatever the reasons for relocating, there are some tax ramifications. Several of them have been affected by the Tax Cuts and Jobs Act (TCJA).
Here’s a look at four new tax laws that home buyers need to know.
1. Lower mortgage interest deduction cap: People who buy a new home this year can only deduct mortgage interest they pay on a total of $750,000 in qualifying debt for a first and second home. It’s $375,000 if married filing separately.
Note that this loan lid is for both homes, not a $750,000 mortgage on each.
Before the TCJA changes, which in this instance took effect on Dec. 15, 2017, interest was fully deductible on total mortgages of up to $1 million as long as they were secured by primary or second residences.
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While this post if for folks buying a home now, I do want to point out a couple of timing notes for prior homeowners.
The TCJA provides an exception for buyers who had a contract on the home they wanted before the mid-December 2017 cut-off date. As long as they closed on the sale by Jan. 1, 2018, they get to stay under the prior $1 million limit.
Also, if you are in your pre-TCJA home and decide to refinance it, the new tax law consider the new mortgage under the original loan’s date. So again, the prior $1 million mortgage limit for tax deduction purposes still applies.
2. Limited property tax deduction: By now, even folks who don’t own homes know about the TCJA’s limit on the amount of state and local taxes (SALT) you now can claim as an itemized deduction.
That’s because the $10,000 SALT deduction limit applies to all salt or more local levies, including real estate and income taxes. Married couple filing jointly face the same limit. Spouses who file separately can deduct $5,000 each.
Before the tax reform changes, there was no limit on any SALT deductions.
You also might find of interest: States still fighting feds over SALT deduction limit
While income taxes are a part of this, in parts of the county where the real estate market is hot, homeowners are finding the real estate tax limit problematic. For many, their property taxes already push the limit. When you add in income taxes in those states that collect them or even sales taxes if that’s your choice, it’s easy to go over the 10K top.
True, in most cases, homeowners won’t need to worry about his cap. The new, much larger standard deduction amounts mean they no longer are itemizing.
Still, if you find filling out a Schedule A works better for you, note the SALT cap, especially if your new home’s property taxes are relatively large.
3. Home equity write-offs possibly limited: A lot of folks have used their homes as source of funds by taking out home equity loans or home equity lines of credit (HELOC).
There are books on the wisdom of turning your residence into an ATM and I’m not here to comment or judge (at least not in this post). The new tax law, however, has issued its take on such financial moves.
TCJA says you can’t deduct interest on home equity loans or HELOCs if you use the money for any reason other than “to buy, build, or substantially improve your home.”
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That means that the interest on a home-related loan you got to pay for the uninsured portion of the new roof you got after that historic hail storm can be claimed. So can the HELOC money that went toward adding another bathroom so your mother-in-law’s move into your home won’t be as disruptive.
But if you use the home equity funds to pay for a bucket list Mediterranean cruise or your child’s college costs, you won’t be able to claim the interest on the home-related loan.
4. Moving expense deduction limited to active-duty military: Under prior tax law, any person who moved for job reasons (and who met the distance and time rules) could claim their relocation costs.
Even better, the old moving deduction didn’t require you to itemize. It was one of the so-called above-the-line deductions.
You also might find of interest: No more tax help for non-military moving
Now, however, the TCJA limits moving deductions, which remain an above-the-line claim, to active duty military personnel who are relocating per U.S. armed forces orders.
Apparently little real-world effect: Sorry if I harshed your new home purchase bliss, but it’s better to know the tax implications before you get too far into the relocation process.
But realistically speaking, these tax law changes probably won’t make much difference to most folks buying their first homes or another one after they’ve decided, for whatever reasons, to move.
Yes, the tax breaks for assorted home-related costs are/were nice, but taxes are not the reasons people buy a house.
At most, prior tax law might have affected the size of house (and related tax deductions) folks sought. But when people were ready to buy or move, then they bought or moved regardless of the tax code effects.
You also might find of interest: New tax law prompts moves by wealthy from high- to lower-tax states
And the TCJA doesn’t look to have changed that, based on the way homes are moving in my neighborhood and according to a recent New York Times article.
“For decades, the mortgage-interest deduction has been alternately hailed as a linchpin of support for homeownership (by the real estate industry) and reviled as a symbol of tax policy gone awry (by economists). What pretty much everyone agreed on, though, was that it was politically untouchable,” write NYT reporters Jim Tankersley and Ben Casselman.
But now, well into the second year of the TCJA’s new home-related tax deduction restrictions, the pair report that there’s no widespread indication that the new Republican-written tax laws have discouraged home buying or adversely affected the prices sellers are seeking.
Sellers still get big tax break: And one major home-related tax break remains for those selling their main homes.
The TCJA did not change the law that says you don’t have to pay capital gains taxes on a big part of the profit you made from the sale of your primary residence.