The new limit on deductible mortgage debt is $750,000, down from the previous $1 million. There are certain situations which may allow a home purchase to qualify for the $1 million, even if the home closes after Jan. 1, 2018. Talk to a tax professional to learn more.
“¢ Interest paid on home equity loans is only deductible if the proceeds are used to substantially improve the residence.
“¢ Interest remains deductible on second homes, but is subject to the $1 million/ $750,000 limits.
“¢ Homeowners who itemize their tax returns can claim up to $10,000 total for state and local property taxes and income or sales taxes. This $10,000 limit applies for both single and married filers and is not indexed for inflation. Here’s what first-time buyers need to know about the Tax Cuts and Jobs Act that was signed into law December 2017. MORTGAGE INTEREST DEDUCTION
“¢ Homes priced $500,000 and below will only be slightly impacted.
“¢ C.A.R. estimates that 60 percent of first-time buyers will purchase a property priced below $500,000, and 80 percent will purchase a home priced below $750,000, so most first-time buyers will not feel the effect that tax reform exerts on home prices.
“¢ The supply of available homes for sale also will be slightly impacted, as homeowners delay trading up/down to their next home. Overall, the California housing market is expected to see a decline of 0.3 percent in active listings in 2018 due to tax reform. HOUSING MARKET IMPACT DEDUCTION FOR STATE AND LOCAL TAXES (SALT)
“¢ Only members of the Armed Forces may deduct moving expenses. MOVING EXPENSES
FIRST-TIME BUYER EXAMPLE
To illustrate how the changes to the standard deduction, repeal of personal exemptions, mortgage
interest and state and local taxes might affect a first-time homebuyer, consider the example of
Barbara Buyer. Barbara, an accountant making $91,580 per year, is single and currently rents an
apartment. She also pays state income tax of $5,086 and makes charitable contributions of
$2,088, but the total of these is lower than the standard deduction, so she claims the
standard deduction.
Tax Difference Under New Law. Even though Barbara would not get the benefit of the personal
exemption under the new law, her higher standard deduction would more than make up for the
loss. In addition, the lower tax rates of the new law would help deliver the total tax cut of $2,632
($15,619 – $12,988) as compared with the prior law.
However, let’s take a look at what happens to Barbara if she were to purchase a condo costing
$440,000 (median price for a condo in California). She takes out a 30-year fixed rate mortgage
at 4.5% interest, putting down 20%. Assuming she buys early in 2018, her first-year mortgage
interest would total $15,372 and she would pay real property taxes of $5,500.
Barbara’s tax liability for 2018 under the prior law is as follows:
Salary income $91,580
Standard deduction ($ 6,500)
Personal exemption ($ 4,150)
Taxable income $79,862
Tax $ 15,619
Under the new law, Barbara would get a tax cut, computed as follows:
Salary income $91,580
Standard deduction ($12,000)
Personal exemption ($ – 0 -)
Taxable income $77,492
Tax $ 12,988
FIRST-TIME BUYER EXAMPLE
As a first-time homeowner, her tax liability under the prior law would be computed
as follows:
Salary income $91,580
Mortgage interest $ 15,372
Real property tax (1.25%) $ 5,500
State income tax $ 3,738
Charitable contributions $ 2,088
Total itemized deductions ($26,699)
Personal exemption ($ 4,150)
Taxable income $60,731
Tax $ 10,837
Note: Under the prior law, Barbara would lower her tax liability for 2018 by $4,783 ($15,619 –
$10,837) by purchasing the condo. This is the financial effect of the prior law’s tax benefits of
buying a home. This amount effectively lowers her monthly mortgage payment by $399
per month.
Tax Difference Under New Law. Even though Barbara would still be able to claim all of her
itemized deductions under the new law, she would lose the benefit of her personal exemption.
However, her taxes would actually go down under the new law by $623 ($10,837 – $10,213)
as the lower tax rate would more than make up for the loss.
Now, let’s take a look at what her tax situation would be under the new law as a
first-time homebuyer:
Salary income $91,580
Mortgage interest $ 15,372
Real property tax (1.25%) $ 5,500
State income tax $ 3,738
Charitable contributions (3.6% of income) $ 2,088
Total itemized deductions ($26,699)
Personal exemption ($ – 0 -)
Taxable income $64,881
Tax $10,213
FIRST-TIME BUYER EXAMPLE
Note: This example pertains to federal taxes only.
Disclaimer: This is not intended to provide legal or tax advice. Application of provisions to
particular tax situations need to be discussed with an accountant, CPA, or tax attorney.