Will the new tax law save you money or cost you money? The answer depends on a complex array of factors that touch on just about every aspect of your financial life. This article is about a subset of your finances: How the tax law will affect homeownership and mortgages.
Among other things, the tax law changes whether and how homeowners deduct mortgage interest and property taxes. Many of these revisions for individuals and families are set to expire at the end of 2025.
Here are five elements of the tax law that could affect homeownership, home selling and moving.
1. Mortgage Interest Deduction
The mortgage interest tax deduction is touted as a way to make homeownership more affordable. It cuts the federal income tax that qualifying homeowners pay by reducing their taxable income by the amount of mortgage interest they pay. Beginning in 2018, the deduction is scaled back to interest on debt up to $750,000, instead of $1 million, for people who buy homes on or after Dec. 15, 2017.
The law carves out an exception for people who were under contract to buy a home before Dec. 15, 2017, as long as they were scheduled to close by Jan. 1, 2018.
Another exception: When you refinance a mortgage, the compromise bill treats the new loan as if it were originated on the old loan’s date. That means the old limit of $1 million would apply.
2. Property Tax Deduction
The former tax law eased the pain of paying property taxes by allowing qualifying taxpayers to reduce their taxable income by the total amount of property taxes they paid. Beginning in 2018, the deduction is limited to a total of $10,000 for the cost of property taxes, and state and local income taxes or sales taxes.
3. Home Equity Deduction
On top of the mortgage interest deduction, the former tax law added a deduction for interest paid on home equity debt “for reasons other than to buy, build, or substantially improve your home.” So, for example, if you borrowed from a home equity line of credit to pay tuition, the interest you paid was tax-deductible.
Starting in 2018, the deduction is eliminated for interest paid on home equity debt.