Introduction: There are a host of tax changes to home ownership made by the 2017 tax act. There are several general changes to the law that may indirectly impact home ownership, such as the doubling of standard deductions which will obviate the need for most taxpayers to itemize deductions on their personal tax returns. This will lessen the tax benefits most will realize from home ownership. The impact of this is discussed below.
Mortgage Interest: The 2017 tax act made a host of changes that specifically affected home ownership. Moving expenses are no longer deductible with a rare exception for the military. Home mortgages are only going to be deductible on interest up to $750,000 worth of debt. It used to be up to one million. Old mortgages are grandfathered, but if you take out a new mortgage, it's a lower amount of $750,000 that applies, which could have an impact on many homeowners. It is not known whether this will actually depress homeownership or the desire to buy, but it will affect the net out of pocket cost of someone getting a new mortgage.
Property Tax: The property tax deduction is greatly restricted by the 2017 tax act. The acronym that's used is “SALT,” State and Local Taxes. State and local tax deductions have been capped, meaning a maximum deduction, at only $10,000, and that figure is not inflation indexed. Now for many people that may be fine, for people in more expensive areas with bigger homes and the taxes that entails, it is going to be another significant limitation.
Casualty Loss: Casualty loss deductions have been greatly restricted or almost eliminated, unless the loss is in a disaster zone declared by the federal government. So, property casualty losses, those deductions are significantly reduced. Something practical all homeowners should do is look into the size of deductible you have on policies because if you can't get a deduction for a casualty loss, you may want a lower deductible so that more of it's covered by insurance, as the tax benefits won't be there to help you.
Itemized Deductions/Standard Deduction: You should also understand the overall big picture of what the 2017 tax act changed regarding home ownership deductions. The standard deduction was doubled under the 2017 tax act, which is a good thing for most taxpayers. It simplifies your returns and so on. However, it makes it much harder to exceed that threshold and get any incremental tax benefit from owning a home (your property tax deduction, your mortgage interest deduction, etc. are all part of itemized deductions.) In other words, even if you had $10,000 in property tax and $10,000 in mortgage interest deductions and you are married filing as a joint tax payer, you're still going to use the standard deduction, which is about $24,000 in 2018 for most married homeowners. You get no incremental benefit from all these expenses for your home as under prior law you would have. So, it changes the economics and the calculations of home ownership.
Economics May Offset Tax Benefit Losses: Overall, these are all significant negatives for home ownership. Other economic factors should also be considered when thinking about home ownership. For example, as of September 2018 unemployment rates are at dramatic lows, the economy is growing, the stock market is hot, all those factors could be seen as far more important for home ownership. Yet, the limitation on mortgage interest, the limitation on property tax deductions, moving expense deductions, etc. will adversely affect home ownership by increasing the net of tax cost.
So long as the economy and the stock market stay hot, the effects of these tax benefit reductions may be more than offset by other economic factors. Will it make more people rent instead of buying? That's often more of a lifestyle decision than a tax decision, but you need to understand the numbers when you go to buy a home because it will be costlier than before the 2017 tax act. Those are negatives that you need to be realistic about when you're looking at a home.
Vacation Homes: Vacation homes are also negatively affected by the 2017 tax act as well. So, there's certainly a greater cost out of pocket to having a vacation home.
Home Office Deductions: If you're looking to buy a home, or if you already own a home, what about home office deductions? So, because of a whole bunch of other changes made by the 2017 tax law, homeowners claiming a home office deduction should increase. For example, if you can no longer deduct most of your property tax and the net tax costs of owning a home, net tax cost is greater. There's a greater incentive if you have your own home-based business to try to claim a home office deduction because a pro rata portion of those deductions that would not otherwise be deductible, may become deductible as part of your home office expense. So, if 20 percent of your home was used for your business, 20 percent of your property tax and other home expenses may also be deductible. A growing number of people have sole proprietorships, home based businesses, etc. So that's another trend that may change because of the 2017 tax act.
Conclusion: Bottom line is everyone must sharpen the proverbial pencil and go through the numbers before relying on any tax deductions from their home. Make sure that you understand the economics of it before you get in it. Take another look, a fresh look, at home office deductions that may be useful.
Cautions and Limitations: This information is provided for general educational purposes only. No specific legal or tax advice is given by this article. Readers should hire an attorney, CPA and other appropriate professionals and obtain proper advice. This article may be construed as attorney advertising.
Subscribe to our email list to receive information on consumer webcasts and blogs, for practical legal information in simple English, delivered to your inbox. For more professional driven information, please visit Shenkman Law to subscribe.