The 2017 tax overhaul, also known as the 2017 Tax Cuts and Jobs Act, is a monumental piece of legislation — over 1,000 pages to be exact — that addresses virtually every component of the tax code. At FREEandCLEAR we are 100% focused on mortgages so we dissected the law to assess how this huge tax plan affects homeowners. Below we outline how the tax plan affects key items such as the mortgage tax deduction, home equity loan interest deduction and property tax deduction. In short, the legislation reduces the tax benefits of having a mortgage and owning a home but it is essential for homeowners to delve into the details and learn how the new tax policies affect them now and in the future.
Mortgage Interest Tax Deduction
Old Policy
Under the prior tax code, the interest expense on mortgage amounts up to $1,000,000 (or $500,000 if married filing separately) was tax deductible. The mortgage tax deduction applied to mortgages on first and second homes defined as qualified residences such as a house, condominium, cooperative, mobile home, house trailer or boat.
New Policy
Under the new tax code, in most cases, for mortgages that close on or after December 15, 2017 the interest expense on loan amounts up to $750,000 (or $375,000 if married filing separately) is tax deductible. For example, if you take out a $1,000,000 mortgage to buy a home in 2018, you can only deduct the interest expense on $750,000 of the mortgage. Under the old tax code, you could deduct the interest expense on the full $1,000,000 loan amount. You can use our Mortgage Tax Deduction Calculator to understand how the tax code changes impact you.
For mortgages that closed before December 15, 2017, interest expense on loan amounts up to $1,000,000 (or $500,000 if married filing separately) remains tax deductible, so the mortgage tax deduction does not change. The new mortgage tax deduction rules are effective for the 2018 tax year and still apply to mortgages on both first and second homes defined as qualified residences. The mortgage tax deduction policy is set to expire at the end of 2025.
Impact on Homeowners
In short, if your mortgage closed before December 15, 2017, nothing changes as you can still deduct interest expense on up to $1,000,000 in mortgages on your primary and secondary residences. If your mortgage closed on or after December 15, 2017, you can only deduct interest on a maximum of $750,000 in mortgages (although there are certain exceptions to the December 15, 2017 mortgage closing deadline for rate and term refinances of mortgages that closed prior to December 15, 2017 and for purchase mortgages on homes that were under written contract prior to December 15, 2017 if the purchase closes prior to April 1, 2018).
The new, lower maximum loan amount that is eligible for the mortgage tax deduction should not impact the majority of borrowers who either do not itemize their tax deductions or whose mortgage amounts are below $750,000. On the other hand, the new policy reduces the tax deduction benefit for borrowers looking to buy higher priced homes that require home loans greater than $750,000. Depending on your interest rate and tax bracket, a borrower that obtains a $1,000,000 mortgage may lose approximately $3,250 to $4,250 in mortgage tax deduction benefits under the new policy and maximum loan limit.
Property Tax Deduction (also know as SALT Deduction)
Old Policy
Under the prior tax code, state, local and property taxes were deductible against your federal income taxes, which created a significant tax benefit for homeowners paying high property taxes.
New Policy
The tax plan permits a total of $10,000 in combined state and local tax (SALT) deductions, including property, income and sales taxes. The property tax deduction rule is effective for the 2018 tax year. The property tax deduction policy is set to expire at the end of 2025.
Impact on Homeowners
The new, lower cap on property tax deductions (as well as state and local income and sales tax) should not impact the majority of borrowers who either do not itemize their tax deductions or who incur less than $10,000 in combined state and local property, income and sales taxes.
Borrowers who itemize their deductions and who pay higher state and local property, income and sales taxes may experience a significant reduction in their property tax deduction benefit. In addition to capping the property tax deduction at $10,000, the deduction now includes state and local income and sales taxes and not only property taxes, which you could previously itemize and deduct separately. For example, if you currently pay $5,000 in property tax and $12,000 in state income tax, you will only be able to deduct a total of $10,000 in combined property and state income taxes instead of the $17,000 in itemized property and state income taxes that you could deduct according to the prior tax code. The new tax policy adversely impacts people who live in states with higher home prices and property and income tax rates.
Home Equity Loan Tax Deduction
Old Policy
Under the prior tax code, the interest expense on home equity loans up to $100,000 (or $50,000 if married filing separately) was tax deductible.
New Policy
Contrary to popular belief, the interest expense on second mortgages, home equity loans and home equity lines of credit (HELOC) is still tax deductible as long as the loan is used to buy, build or substantially improve the property that secures the loan. Additionally, second mortgage, home equity loan and HELOC interest is tax deductible as long as the total amount of loans secured by the property does not exceed the value of the property and the total amount of the loans, including the first mortgage, does not exceed $750,000 (in most cases). For example, if you take out a second mortgage to purchase your primary residence, then the interest expense on the second mortgage is tax deductible. If you take out a second mortgage, home equity loan or HELOC anddo notuse the proceeds to buy, build or substantially improve your home, such to pay for a vacation, college tuition or to payoff credit card debt, then the interest expense on the loan isnottax deductible.
Impact on Homeowners
The tax plan eliminates the $100,000 maximum loan amount for the home equity loan interest deduction which may enable borrowers to deduct more interest expense for larger home equity loans. On the other hand, the total amount of loans against a property including a first mortgage, second mortgage, home equity loan or HELOC cannot exceed $750,000, which may limit the tax deduction benefit. Additionally, the tax deduction benefit for a second mortgage, home equity loan or HELOC only applies if the loan proceeds are used to buy, build or substantially improve the property that secures the loan. So if you use the loan proceeds for a different purpose, the interest expense is not tax deductible according to the new tax law.
This article first appeared on FREEandCLEAR. For more mortgage tools, resources and rates please visit FREEandCLEAR.com.
