When it comes to the new tax plan, everyone from investors to agents to homebuyers and sellers are curious as to how the new laws will impact them? How can they navigate the world of real estate under these new laws?. In our previous blog, we covered how the new tax plan will affect real estate investors, but what about homeowners? Here are some of the most important things you as a homeowner need to know about the tax laws in 2018 and beyond.
Increase In Standard Deductions
Many qualified homeowners have relied on itemizing deductions to reduce their taxable income. Mortgage interest, state and local taxes (SALT), contributions to charity and property taxes are a few deductions that homeowners have traditionally taken advantage of. The new law increases the standard deduction rate to $12,000 for single filers and double that for married couples.
Impact on Homeowners
This change means that a significant percentage of Americans won’t benefit from itemized deductions, and will choose to take the larger standard deduction instead.
Mortgage Interest Deduction
When it comes to mortgage debt, the new law caps the limit of mortgage interest that you can deduct at $750,000, where the previous law capped it at $1M. On your existing mortgages before Dec 15, 2017 you will still be able to deduct up to $1M until you move or refinance.
As per Zillow Research, it make sense for only 1 in 7 US homeowners (14.4% down from 44%) to itemize their deductions and take advantage of the mortgage interest deduction. Closer home, in King County this drops from 90.7% to 51.5%.
Impact On Homeowners
Since the majority of Americans don’t own homes in the $750,000 price range, the change will impact buyers in the more expensive housing markets like CA, NY and Seattle & Eastside in WA, more than those in the median price bracket.
Looking to buy a second home? Olga Marchenko, a seasoned loan officer with Guild Mortgage has a great advice. “Remember that your total mortgage debt will need to be less than $750,000. You could pay more downpayment at the time of purchase or purchase a less expensive home to limit your mortage debt within $750,000.”
Property and Sales Tax
The new law combines all of the state and local taxes (SALT) and puts a $10,000 cap on them for both married couples and single filers. The old plan was unlimited, and property taxes were completely deductible. This change could work as a counterbalance to the increased standard deduction and expanded childcare credits.
Impact On Homeowners
For those in the expensive markets, those who are used to paying five figures in local and state taxes, this cap means a big change in how much they can deduct from their federal income taxes. Across the country, over 4M people pay more than $10,000 in property taxes alone. Residents in high-tax states that pay income tax will feel the change the most, as they won’t be able to deduct all of their expenses. Homebuyers in the median price bracket won’t feel the change like those in the expensive market.
Home Equity Loan Deductions
Under the old law, homeowners could borrow against their equity and use the proceeds for whatever purposes they chose – vacation, buying a car, furniture etc., The new law eliminates the deduction for interest paid on existing home equity debt through 2025 unless the proceeds are used to upgrade a residence.
Impact on Homeowners
Homeowners can still deduct interest on HELOCs and second mortgages provided they meet two criteria:
- they use the proceeds of the loan to make “substantial improvements” to their home.
- the combined total of their first mortgage balance and their HELOC or second mortgage does not exceed the new $750,000 limit on mortgage amounts qualified for interest deductions.
“You could still use HELOC to fund your investment properties. HELOC is still the cheapest funding source.”
Owning a vacation home is a dream many Americans have, and the new plan shakes things up a bit when it comes to owning a second home. As mentioned above, the current plan caps the combined mortage deduction at $750,000. Homeowners who own a second home and don’t rent it out won’t get any tax breaks, but if they do rent it out, that’s another story. The income earned on a vacation rental is tax-free as long as it’s rented for 14 days or less. If it’s rented for longer, the income must be reported.
Impact on Homeowners
Homeowners who already have a $750k mortgage on their primary residence and plan to buy a second home won’t be able to deduct the interest on that second mortgage. The elimination of the home equity loan deduction may make homeowners a little more hesitant to buy a vacation home since most use the equity on their main residence to finance their second home.
On a more positive note, homeowners who turn their rental property into a business will be able to use some of these new laws to their advantage.
They can claim deductions for mortgage interest and state and local taxes as a business expense.
What About Real Estate Investors / Landlords
The new tax law is great for Real Estate investors / landlords.
Economists and housing experts across the board agree that the new tax plan will slow down the rate of climbing home prices in some of the most expensive areas. The changes will give prospective homebuyers more reason to wait or stay where they are instead of jumping into buying a home. If the tax benefits don’t work for them, many homebuyers may choose to rent instead of buy. This will mean rent will increase and sale prices will come down, which is great news for Real Estate investors, and not so great for renters.
If you are looking for Cash Flow rentals and profitable flips in Seattle area, head to www.InBestments.com where you can still find great investment property deals despite the Seattle area being so piping hot. At InBestments we use advanced data science technologies to find great deals and to remove guesswork from investing so that everyone can invest with confidence, like pros. While Elon Musk makes his forays to get Real Estate on Mars, you could win great Real Estate deals, near home 🙂
Overall, the new tax laws have surely taken away the preferential treatment for homeowners. Real Estate investors have definitely come out ahead with these reforms. The impact that the new tax reform will have on individuals varies greatly by location and local laws. It’s highly recommended for all homeowners to discuss how the law affects them in their particular case with a CPA. Staying up to date on the changes in real estate tax laws is the best way to make the smartest financial decisions regarding your home.
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