In a NutshellTax breaks have long been a major perk of homeownership in the U.S. But the changes to the tax code adopted in December 2017 significantly affect some popular home-related tax benefits. Here is information about tax reform for homeowners.
This article was fact-checked by our editors and reviewed by Christina Taylor, MBA, senior manager of tax operations for Credit Karma.
Homeownership may be a key component of the American dream for many people, but it’s one that doesn’t come cheaply.
At the end of 2017, U.S. consumers owed $8.88 trillion in mortgage debt and $444 billion on home equity lines of credit, according to a fourth-quarter 2017 report by the Federal Reserve Bank of New York’s Center for Microeconomic Data.
Many homeowners have long relied on being able to deduct mortgage and home equity interest from their federal income taxes as a way to help defray the cost of homeownership.
In fact, the U.S. Treasury Department estimates that in 2017, taxpayers deducted $63.6 billion in mortgage interest on owner-occupied homes thanks to the mortgage interest deduction. This popular deduction is changing significantly thanks to changes to the tax code. Far fewer taxpayers may be eligible to claim it and many who do will face new limitations.
The big picture
Changes to the mortgage interest deduction are just the tip of the iceberg when it comes to the impact of tax reform on homeowners, some experts say.
“Homeowners lost some significant deductions,” says Paul S. Herman, owner of Herman & Company CPAs, PC in White Plains, New York.
The loss of these deductions may affect not just individual owners, but the entire real estate market.
“Because many of these deductions were initially introduced to incentivize people to invest in purchasing a home, the removal or limitation of deductions may impact people’s decisions to buy homes,” says Lydia Desnoyers, founder of Desnoyers CPA LLC in Miami, Florida.
Whether you own your home already or are thinking of buying, here are five key changes to the tax code that impact the financial realities of homeownership beginning in 2018.
New limits on mortgage interest deduction
Prior to tax reform, you could deduct interest on loans up to $1 million (up to $500,000 for those married filing separately) used to purchase, build or substantially improve a qualified residence. The IRS views that type of loan as “acquisition indebtedness.” Prior to tax reform, you could also deduct certain interest when you refinanced that acquisition indebtedness.
Under tax reform, if you take out a new mortgage between Dec. 31, 2017, and Jan. 1, 2026, you can only deduct the interest on up to $750,000 of that acquisition indebtedness ($375,000 for those married filing separately).
However, if you took out a mortgage before Dec. 15, 2017 and closed on the purchase prior to Jan. 1, 2018, it’s grandfathered in under the old limitations.
Changes to deduction for home equity loans
Of course, loans to acquire a home aren’t the only kind of home-related loan; there are also home equity lines of credit, or HELOCs. You can borrow against the equity in your home for purposes such as making renovations or consolidating other forms of debt.
Before tax reform, homeowners could deduct the interest on up to $100,000 of home equity debt for a qualified residence ($50,000 for married taxpayers filing separately). The amount of home equity debt also couldn’t exceed the fair market value of the property less the acquisition indebtedness.
Tax reform temporarily eliminates the deduction for interest on home equity debt for some homeowners, even for those whose loans predate tax reform. The suspension ends for tax years after Dec. 31, 2025.
However, the IRS has recently said that many homeowners may still be able to deduct interest for home equity loans. “The Tax Cuts and Jobs Act of 2017, enacted Dec. 22, suspends from 2018 until 2026 the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan,” the agency said.
Higher standard deductions = fewer itemizers
To claim the mortgage interest deduction, you must itemize your deductions. And itemizing generally only makes sense if your deductions exceed the standard deduction.
For the 2017 tax year, the standard deduction was $12,700 for those married filing jointly or those filing as a surviving spouse, $9,350 for heads of household, and $6,350 for single filers and those who are married filing separately.
For tax years between Jan. 1, 2018, and Dec. 31, 2025, the standard deduction increases to $24,000 for those married filing jointly, $18,000 for head-of-household filers and $12,000 for all other individuals.
According to the Congressional Research Service, 30 percent of taxpayers itemized deductions in 2014. However, with tax reform significantly increasing the standard deduction beginning with the 2018 tax year, fewer taxpayers may find itemizing the better option.
Deductions for SALT are limited
Prior to tax reform, taxpayers could generally deduct amounts they paid for local and state income taxes and state and local property taxes, often called SALT, from their federal income tax bill. Or they could opt to deduct state and local sales tax instead. The deduction allowed taxpayers to avoid paying federal income tax on money they had to pay to their state or local governments.
In 2015, taxpayers claimed SALT deductions on nearly 43 million tax returns for a total deduction of more than $352 million. But tax reform has changed things significantly and permanently limits the deduction beginning with the 2018 tax year.
Individuals may only deduct up to a total aggregate of $10,000 ($5,000 for those married filing separately) in state and local property taxes and state and local income taxes that don’t pertain to trade or business.
As a corollary, taxpayers who previously had to report state and local income tax refunds as part of their income may no longer have to do so in future.
Prepayments on property taxes have also been affected. At the end of 2017, homeowners may have prepaid 2018 property taxes hoping to take a full deduction before the rules changed. However, the IRS has said that those prepayments could be deductible only if they were used to pay 2018 tax that had actually been assessed in 2017.
No home office deduction for employees
Under tax rules prior to tax reform, if you worked from home for an employer you might have been able to take a home office deduction as an unreimbursed work expense. You would have had to itemize, and the expenses would have needed to exceed 2 percent of your adjusted gross income. Plus, you would have had to use your home office regularly and exclusively for your work to be eligible for the deduction.
However, tax reform has suspended all 2 percent deductions between Jan. 1, 2018, and Dec. 31, 2025.
“The home office deduction for employees who work at home has been suspended,” Herman says.
If you run your own business or freelance, however, this change probably doesn’t affect you, he notes.
“The home office deduction can still be taken for self-employed people.”
Moving expense deduction gone … for most taxpayers
Tax reform has not only stripped away tax breaks that helped make homes affordable, but the law also took away a deduction that helps you move from home to home.
“Currently, taxpayers can deduct some moving expenses when they move for a new job if the move meets certain criteria,” says Josh Zimmelman owner of Westwood Tax & Consulting in New York. “Under the new tax bill, this deduction will be eliminated for most taxpayers. After 2018, only members of the armed forces on active duty can deduct moving expenses.”
There is one bit of good news if you’re planning a move, though. If you meet qualifying criteria, current tax laws allow you to exempt up to $250,000 in capital gains ($500,000 if you’re married filing jointly) and sell your home for more than you paid. Under tax reform, this rule remains in effect.
“Although original versions of the bill eliminated this exemption, the final law has kept it with no changes,” Zimmelman says.
Tax reform significantly affects a number of tax breaks that homeowners have historically enjoyed. Those looking to buy homes costing more than $750,000 could be most affected, including those purchasing modest homes in very expensive real estate markets like San Francisco or New York. Homeowners in states with higher income or property taxes could also see a big impact on their 2018 tax bill.
Ultimately, homeowners will need to determine if itemizing deductions still makes sense for them considering the limitations on homeowner tax breaks and the increased standard deduction.
Christina Taylor is senior manager of tax operations for Credit Karma. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She co-developed an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.