The Truth On How The Tax Cuts and Jobs Act of 2017 Affected Homeowners
When the Tax Cuts and Jobs Act of 2017 passed on January 1, 2018, there was plenty of hype surrounding the notion that it was time to buy. The bill promoted the benefits to new and potential homeowners, including:
– Tax rate reductions
– Mortgage interest deductions
– Standard deductions indexed for inflation
– Deductions for state and local taxes
– Personal exemptions repealed
This all sounds great, right? Well, now that we are in the third quarter of 2018, it is time to assess the truth behind the bill. There were many aspects of the bill that were either overlooked or lacked publicity – but now that homeowners are living the changes, more convincing reports are in. Here are 5 of the recent issues we have found reported as having impacts on homeowners both in Texas and across the nation.
1. There are restrictions on deductibility for refinancing. The deductions for interest on refinances have been eliminated. Prior to the new law, deductions for qualifying mortgage interest plus $100,000 for equity debt were permitted; now, the IRS has eliminated the deductions “unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan.”
What does this mean? Individuals who refinanced their home for reasons other than those identified by the IRS – such as to improve their debt – have lost opportunities for deductions. This reduces motivation for individuals to refinance, ultimately reducing their ability to manage in the United States debt crisis.
2. PMI has been removed. PMI, or premiums for mortgage insurance, were included with deductible home mortgage interest. This allowed struggling home buyers to receive a loan through the addition of PMI, allowing for a reduction in the expected 20% down on a home; however, now that this option has been removed, home buyers are struggling to meet the minimum criteria to purchase a home and have no alternative around the rules.
Homeownership boosts the US economy, provides social benefits, and develops and distributes wealth. Unfortunately, the removal of PMI is not sustainable and eliminates opportunities for the middle and lower classes. As real estate wealth leans towards the upper class, that of the middle class appears to be shrinking.
3. There are limits on state and local tax deductions. The limit to claim on Schedule A is now set – $10,000 for an individual and $5,000 for married taxpayers filing separately. This is primarily affecting individuals living in high-property-tax states and those in high-income-tax states.
Texas is a high-property-tax state. Have you looked at how this will affect your taxes for 2018 in comparison to 2017? Remember too that Texas does not have a state income tax, but Texans who own a home outside of Texas may be responsible for the additional taxes.
4. Mortgage interest deduction is capped at $750,000. The mortgage limit under the previous tax law was $1,000,000 – this means that any interest exceeding the cap can no longer be deducted unless the mortgage was pre-existing.
This cap will make it challenging for individuals who purchased homes near the $750,000 price point to sell their home in a couple of years. With inflation, the buyer pool may decline. Although individuals expected to get ahead by buying now, they may feel the consequences in later years.
5. No more casualty losses. A casualty loss is defined as damage, destruction, or loss of your property from a sudden unexpected or unusual event, such as a fire, flood, hurricane, tornado, or earthquake. Prior to the new bill, casualty losses could claim a deduction on their filings – however, the deduction can now only be claimed on a federal disaster.
This is an important aspect to consider for any homeowner in the state of Texas, where seasonal storms and heavy rains can dramatically affect the interiors and foundations of homes. With the passing of the Tax Cuts and Jobs Act, homeowners will no longer be protected unless the storm is considered a federal disaster. Homeowners’ insurance is even more important than it was before – but it can be costly at the end of the day.
Is Owning Still Better Than Renting?
The answer to this question is debatable. Although the new tax bill provided many benefits for new and seasoned homeowners, it also created additional challenges. The pros and cons of each side need to be identified to determine if keeping your home is the best option for your long-term financial plan.
Consider the benefits and the risks, and consult with a professional. The changing dynamics of deductions and restrictions could be negatively impacting your future. To learn more, contact us at Gulf State Homebuyers and we can help you understand your position.