Federal tax benefits are among the many compelling reasons for purchasing a home. But for many homeowners, starting this year those benefits may look a little different.
The Tax Cuts and Jobs Act took effect Jan. 1, 2018, bringing sweeping changes to the American tax law system.
Taxpayers did not see those changes when they filled out their income tax forms last year, but they will be very noticeable this year and every year. Parts of the law – including adjustments to the tax rates and increased personal deduction and child tax credits -- expire at the end of 2025, unless extended by Congress.
Some things haven’t changed. For instance, the exclusion of capital gains tax on real property remains the same.
When you sell property that increases in value, you usually would be required to pay capital gains taxes on that increase – minus the costs of selling the property and any improvements you have made.
But if that property is your primary residence and you lived in it for at least two of the five years before the sale, you likely can avoid paying taxes on the first $250,000 in capital gains ($500,000 for married couples filing jointly) on the property.
(In a few specific circumstances, you may be allowed to write off a portion of the capital gains even if you have not met the eligibility requirement.)
Another example: Rules about tax-deferred exchanges that can occur in the sale of investment property if very specific criteria are met, including purchase of qualified replacement property within a certain period of time.
These rules did not change. Some of the rules that did change can have significant impact on homeowners.
• The mortgage interest deduction. This popular tax deduction allows homeowners with loans against their property to deduct some or all of the interest paid on those loans. Interest paid on mortgages for primary and secondary residences is deductible up to certain limits.
If you have a mortgage on your home that you took out before Oct. 13, 1987, all of the interest you paid in 2018 is deductible.
If you have a mortgage on your home that you took out between Oct. 13, 1987, and Dec. 16, 2017, you can deduct interest on mortgages up to a total of $1 million ($500,000 for married people filing separately).
The new tax bill reduced the limit to interest on up to $750,000 ($375,000 for married people filing separately). So, with a few exceptions, folks who purchased a home in 2018 are more limited in their mortgage interest deductions than those who bought earlier.
• The interest deduction for lines of credit. If you use a line of credit up to $100,000 in the purchase of your home, or to build or substantially improve your property, you may be able to deduct the interest you paid, as long as you do not exceed the mortgage interest deduction limit. If you use the line of credit for any other purpose – paying down debt, for example, or helping your children purchase a home -- the interest is likely not deductible.
• Deduction for state and local taxes. Until this year, you could deduct the amount you paid in property taxes plus state and local income taxes from your federal taxes, regardless of amounts. The new tax law caps that deduction at $10,000 for both married couples and single people.
So, if your property taxes equal $8,500 per year and your state income taxes are $6,000, you would be paying a total of $14,500 in state and local taxes. But you would only be able to deduct $10,000 of that on your federal tax return for 2018.
• Deduction for moving expenses. Taxpayers who moved for certain approved reasons used to be able to deduct their unreimbursed moving expenses. Beginning in 2018, only active duty military personnel are eligible for this deduction.
• The mortgage insurance deduction. This is not about property insurance, which protects you if your home is damaged by fire or other calamities.
This rule applies to insurance required by lenders on some mortgages, usually loans involving low downpayments. That insurance was deductible beginning in 2006 through 2014. Congress then extended the deduction for one year each time for the tax years 2015, 2016 and 2017.
On Jan. 8, Rep. Julia Brownley (D-CA) introduced the Mortgage Insurance Tax Deduction Act of 2019, which would permanently enshrine the deduction in the tax code and would apply to all amounts paid or accrued since Dec. 31, 2017. That bill is awaiting action in the House Ways and Means Committee.
So, for now, mortgage insurance is not deductible. That could change. Past Congressional action has made deductibility retroactive. If that happens again and you have already filed your taxes without claiming the deduction, you’ll have the option of amending your tax return.
Everyone’s tax situation is unique. For information on how these rules apply to your tax liability, consult your trusted tax accountant or attorney.
If you are thinking about buying or selling real estate, contact your local Realtor today.
Cher Wollard is a Realtor with Berkshire Hathaway HomeServices Drysdale Properties in Livermore.