The Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act, also known as the GOP tax reform bill, was enacted late last year. This massive tax overhaul is effective beginning in the 2018 tax year and sunsets in 2025. Among its numerous provisions are a few changes affecting the tax benefits of homeownership.

Mortgage Interest:
Under the old law, you can deduct the interest you pay for your total mortgage debt up to $1,000,000 on your primary and second homes. For homes purchased before December 15, 2017, there is no change. For homes purchased on December 15, 2017, or later, you can deduct only up to a lower mortgage debt limit of $750,000.

There are two exceptions that still allow for the $1,000,000 limit under the new law: (1) If you were under contract to buy a home before December 15, 2017 and closed before January 1, 2018; or (2) if you refinance your mortgage with a new loan.

Property Tax:
Under the former law, you can deduct the entirety of your property taxes. But starting in 2018, you can only deduct up to $10,000 for the combination of property taxes and either state/local income or sales taxes. Some homeowners rushed to prepay their property taxes in 2017, but to qualify for the deduction, property taxes need to be paid and assessed in 2017. Homeowners who prepaid their taxes based on estimated assessments, or who tried to pay several years’ worth of taxes at once, are unable to bypass the new rules.

Home Equity Interest:
Home equity is the difference between a home’s market value and the remaining balance on the mortgage. Home equity loans allow homeowners to borrow against the home’s value to pay for other expenses such as college tuition or home improvements. Under the former law, you were able to deduct the interest up to $100,000 of home equity debt, that were not used to buy, build or improve your home. However, the new law eliminated the deduction all together.  

Capital Gains Tax (unaffected):
The capital gain on a house is the amount you sell a house that is above the price you originally paid for it, and is treated as taxable income. If you’ve lived in the property as your primary residence for at least two of the last five years before you sell it, you can exclude up to $250,000 (if single) or $500,000 (if married filing jointly) of this capital gain as taxable income. The capital gains tax exclusion rules have, thankfully, not changed.