Your job is taking off and you’re starting to get settled into your career, congratulations! Now that the puzzle pieces of life are starting to fall into place, it’s time to consider laying down some roots and buying a house. Sounds nice, doesn’t it? However, buying a house is a big milestone, whether it’s a small starter or your forever home. The purchase may affect the way that you file taxes next year. Here are some of the major changes that the 2018 tax law has affected homebuyers.
Deducting Mortgage Interest May Not Be In Your Best Interest
The new tax structure has nearly doubled the standard deduction, making it less lucrative to itemize deductions for many families. Homeowners who deducted mortgage interest from their gross income had average savings of $1950 for taxpayers in 2016.
Now, however, only those homeowners in the top 30% priced homes can save more itemizing their deductions, including interest they pay on their mortgage. Work with your tax attorney to look at your savings under the standard deduction compared to that of itemized deductions.
You May Not be Able to Deduct All the Interest You Pay
Home buyers in the most expensive markets may not receive the full benefit of tax deductions either – they may not be able to deduct the full amount of their mortgage loan interest from their gross income. Under the new regulations, insurance deductions are capped at $750,000, instead of the $1 million cap from prior years.
While this affects only a small percent of the population, it will affect the housing market, as houses for sale in the highest brackets may not attract many buyers. For residents of Hawaii, D.C., and California, this will have the greatest impact, although homebuyers with homes valued at up to $937,500 who put down a down payment of 20% or more will still get to deduct the full amount of interest on their mortgages.
Home Equity Loans are No Longer Deductible
You may have opted for a home equity loan to finance home improvements, pay for a child’s education, or to settle medical bills. These loans, although risky for some, allow you to borrow against the value in your house, and have been a lifesaver for many miles.
Now, however, you’ll no longer be able to deduct the interest on your taxes forms your home equity loan. Prior to 2018, taxpayers could deduct the interest on these loans, with a cap of $100,000.
State and Local Property Taxes May Not Be Deductible
State and local property taxes will vary by location; states with no sales tax typically see larger property tax rates. Residents of those states have enjoyed the larger itemized deductions of the property taxes in the past, but under 2018 regulations, this has changed for many homeowners as they may no longer deduct the full value of taxes paid to local governments from their federal returns. New tax reforms capped the total state and local tax (SALT) deduction at $10,000. For homeowners in wealthier areas, their state and local taxes often exceeded $10,000.
Making sense of changes in your tax obligation can be tricky. An accounting firm specializing in the changes to the U.S. tax code can help homeowners understand their options, and explain the difference in their taxes. Many homeowners became used to paying a certain amount in taxes and may have “sticker shock” with their new tax bill.
To ensure that you’re able to recoup the highest amount possible from your home loans, work with a professional who understands the real estate experts and can guide you on if you should buy a house or not – when the time is right, you’ll seek the proper guidance.