What were the tax laws and when did they change?
For homes bought (or under contract) before December 15th, 2017, there is no change. Also, for those who refinance a home bought before then, the law protects the new loan as if it were the original.
In the beginning of 2018, a few changes went into effect.
- mortgage interest deductions went from $1M to $750,000
- property tax deductions were capped at $10,000
- home equity debt interest deductions went from an unspecified $100,000 deduction to specific home improvement deductions only
- moving expense deductions for those who qualify changed to ONLY active duty military
Mortgage Interest Deduction Explained
This deduction allows qualifying homeowners to pay less income taxes by lowering their taxable income based on the amount of mortgage interest paid. This applies to a primary and secondary residence.
Example of Mortgage Interest Deduction Changes
With the current jumbo loan* and interest rate of 3.875% (according to https://www.wellsfargo.com/mortgage/rates/), a $750,000 loan interest rate would be about the $2,422/month or $29,422/year. A $1M loan would be about $3,229/month or $38,748/year. Essentially, homeowners with homes over the million mark that purchased after December 2017 are losing out on upwards of around $9,000** in interest tax deductions with the current new laws that are set to expire at the end of 2025.
**This is a rough estimate for sample purposes only. Actual costs and changes should be calculated on an individual basis and will vary with interest rate, tax bracket and itemized or standard deduction options.
*Jumbo loans are for borrowers looking to buy or refinance a home that exceeds conforming loan limits (the limit on conforming loans is $484,350 in most areas of the country).
Property Tax Caps
Just like the Mortgage Interest Deduction, homeowners can reduce their taxable income by how much property taxes they paid. With the new law, there is a $10,000 limit on the combination of either property, state and local income taxes; or property and sales taxes.
Home Equity Changes
The freedom of using a home equity line of credit for anything under the sun is gone. President Trump’s new law goes back to the basics and states that the deduction for interest on home equity debt can only be used for costs incurred to buy, build or substantially improve the home.
Good News for Hampton Roads
Current available homes for sale over the $750,000 mark are just under 6% of the total inventory, at 536 properties out of 9,274 (according to hrmls.com). Although these changes haven’t been felt by many in the area, it’s always good to be prepared and know your options. Being an active military area, it’s good to note that deductions for military moving expenses are still accepted as well.
We love providing you information, but for financial matters, it’s always important to visit your trusted tax professional.
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