The Tax Cuts and Jobs Act (TCJA) was passed in 2017 and made some pretty significant revisions to deductions long enjoyed by homeowners. But, these changes didn’t actually take effect until 2018, which means most homeowners will only start to feel the effects while filing taxes this year. Since we’re less than a month out from April 15th, the deadline to file 2018 taxes, it seems fitting to do a recap of what changes are going into effect and any new updates.
Anyone who took out a mortgage after December 15th, 2017. The tax law doesn’t affect mortgages that were secured prior to December 15th, 2017.
Important Exception: The Internal Revenue Service (IRS) recently clarified that “any taxpayer who entered into a binding contract before December 15, 2017, to close on the purchase of a principal residence to close before January 1, 2018, and who purchases such residence before April 1, 2018 is considered to have incurred acquisition debt before December 16, 2017.”
If you signed a purchase contract to buy a home on December 14th, 2017, but didn’t close until February 15th, 2018, since you countersigned before the cut off date, your mortgage is grandfathered into the old rules.
But, these changes are set to go into effect for everyone starting in 2025. So, it’s good to brush up on all the changes now!
What’s Changed for Homeowners
Mortgage Interest Deduction
The new TCJA rules put stricter limits on the mortgage interest deduction—which allows homeowners who itemize their expenses to deduct mortgage payments from their taxable income.
- New Limit: $750,000 loan amount ($350k each for married couples filing separately)
- Previously: $1,000,000 loan amount ($500k each for married couples filing separately)
According to Freddie Mac, the average interest per year on a $750,000 mortgage is around $32,155 in the first year. This figure represents the top of band for what you can deduct from your taxable income under the new law—which can vary slightly based on interest rates.
Under the old tax law, on $750,000-$1,000,000 you could have deducted up to as much as $42,874. Meaning, if you took out a new loan for a million dollars in 2018 vs. 2017, you’ll see a net loss of about $10,719 in tax deductible interest.
Some Home Equity Loans are Deductible, but Not All
Before 2018 a homeowner could deduct the interest of any home equity loan up to $100,000—regardless of how they used the funds (paying off student debt, car loan, etc.) But, the Tax Cuts and Jobs Act of 2017 only allows home equity debt to be deductible if it’s used to make “significant improvements” to your home.
Essentially the only way to deduct home equity debt now is for it to qualify as acquisition debt—funds used to buy, build, or substantially improve your property—even if the debt itself is a home equity loan. No more deductions for using home equity cash for paying off student loan debt, credit cards, or other expenditures. What’s more, a homeowner’s primary mortgage amount + deductible home equity loan can’t go over the new $750,000 threshold.
If you purchased a home for $500,000 and decide to take out a $250,000 home equity loan to build on a new addition, the interest on both mortgages would be tax deductible. However, if you used the $250,000 to pay off personal loans, not secured to your primary residence, the amount would not be tax deductible.
TCJA also limits the SALT (State and Local Tax) deduction to $10,000, and there wasn’t a cap on this previously. SALT includes property, income, and sales taxes and this change disproportionately affects taxpayers in high tax states like California, New York, New Jersey, and Maryland, etc.
According to IRS data, New Yorkers take the largest SALT deduction in the U.S. and in 2014:
- 34% of New York tax returns included a deduction for state and local taxes.
- The average size of those New York SALT deductions was $21,038.02.
The new tax law effectively cuts this deduction in half, and will have a noticeable effect on New York state taxpayer returns this year, along with high income earners & those who live in states with a high property or sales tax liabilities.
Moving Expenses are No Longer Deductible
Even if you had to move across the country for a job, unfortunately your moving expenses are no longer a qualified deduction under the new tax law. There are a couple caveats to this:
- Deductions still exist for active duty military personnel, or companies that move—meaning if you own a small business, you can still write off these costs!
- If your company is reimbursing you for moving expenses, you no longer have to pay taxes on that amount as income.
Larger Standard Deduction
The changes to the mortgage interest and SALT deduction are part of a wider effort to decrease the amount of people itemizing their expenses rather than taking the standard deduction. To soften the blow of these changes, the Tax Cuts and Jobs Act nearly doubled the standard deduction to $12,000 for individuals and $24,000 for married couples filing jointly.
The Bottom Line
Although the larger standard deduction will most likely decrease the number of people who choose to itemize and ultimately result in a larger tax benefit for some Americans—it doesn’t ease the pain of those who chose to take a gamble or are thinking of investing in their own home.
For decades, these deductions have acted as incentives for people to realize the American Dream of homeownership, and rolling these out at what could be the top of a 9-year bull market could produce significant ripple effects on housing. Whether these changes make potential homebuyers, especially in states with high property taxes, rethink their decision to buy vs. rent remains to be seen.