The new tax plan is now officially law and as the dust continues to settle, there’s much confusion about how its provisions impact homeowners across the nation.
The plan includes a handful of changes to take note of, among them a new combined deduction limit of $10,000 for property, state and local income taxes. (Residents on the West Coast and in the Northeast where taxes are highest will be the most impacted by this change.)
In addition, interest paid on loans for vacation homes is no longer deductible. And perhaps most significant to middle class homeowners far and wide, the interest on home equity loans is no longer deductible.
The popular mortgage interest deduction has also been impacted. It is now limited to $750,000 of debt and the property must be your primary residence. However, for homes purchased before Dec. 15, 2017, it remains $1 million.
The big takeaway here, say experts, is that home ownership has become more costly, and in some of the pricier states in the nation such as New York, California and Washington, it is far more costly.
“They tried to do a few good things with this tax bill, but the home equity and property tax changes definitely impact almost all Americans in a negative way,” said Sahil Gupta, CEO and co-founder of San Francisco-based Patch Homes Inc., a home equity financing company.
Here are five insights from experts regarding the new plan, how to prepare for it and ways to offset some of its changes.
Hire a CPA to Help with Your 2018 Taxes
Frugal homeowners who have previously completed taxes on their own may want to consider engaging a CPA for assistance next year.
“That $100 or $150 investment in having a professional do the work could be well worth it when looking at your new tax bill,” said Gupta.
Be More Mindful of Debt Tied to Your Home
The elimination of the deduction for home equity loan interest is likely to be among the least popular changes in the new plan.
Not only does this provision affect all new loans, it also impacts those taken out before the new tax plan was adopted, a fact that may catch many homeowners off guard.
“This is going to hurt a lot of homeowners, especially since it applies to all existing home equity loans, unlike the mortgage interest deduction change, which is only impacting newly originated mortgages,” said Gupta. “A lot of consumers have home equity lines of credit. They have to be careful because for the average person with a HELOC that interest is no longer deductible.”
Bottom line, said Gupta, is that if you’re going to pull money out of your house, it’s important to have a good use for it.
“Consumers should overall be more aware of debt taking,” Gupta added. “For a lot of the debt that was previously tax deductible, that’s no longer true.”
At least one alternative to using home equity loans going forward will be instead to do a cash-out refinance on your home, using the money from that process the way you would have used HELOC money. This makes the most sense for homeowners with smaller mortgages, those less than $750,000, said Gupta. (Because the mortgage interest for loans under $750,000 is still deductible).
Consumers may also want to focus on using personal loans or zero percent APR credit card offers as a method to fund short-term purchases, instead of home equity.
A Larger Down Payment Can Offset the Mortgage Interest Deduction Cap
The mortgage interest deduction is now limited to $750,000 in debt, a fact that will primarily impact residents of those already mentioned higher cost states where the average value of homes often exceeds $1 million.
One way to get around this change is to plan on having a larger down-payment for your home purchase, if you can afford it. The idea is to reduce the amount you’re borrowing for a mortgage to $750,000 or less.
“So, instead of a standard 20 percent down, if homeowners can afford it, then putting down 30 percent or more might be a better option,” said Gupta. “This will help reduce their monthly mortgage payment as well.”
While Some Deductions Are Shrinking, Others Tax Benefits Are Expanding
For those who have children, the new tax plan includes at least one increased benefit, which may help offset the changes to home ownership deductions, said Brian Ashcraft, Director of Compliance at Liberty Tax Service.
“A lot of times home owners will have families. The child tax credit has been expanded to $2,000, as opposed to $1,000 and $1400 of that is refundable,” said Ashcraft.
The $1,400 refund is available only if the $2,000 credit is larger than your federal income tax liability.
Also noteworthy, far more people are now eligible for the credit, it has been expanded to include households making as much as $400,000 annually. In other words, even upper middle class wage earners will now be able to take the credit, explained Ashcroft.
Create a Home Office
One last tip to help offset the many lost deductions, consider creating a home officethis year, says Jeff Miller, co-founder of Maryland-based AE Home Group, real estate agents who help buyers and sellers navigate the Baltimore market.
“Individuals in high property tax states like New York, California and Maryland are seeing a significant impact on their taxes,” Miller explained. “Clients we work with plan to reduce this impact by leveraging the home office deduction. They will be repurposing a room in their home into a home office that will allow them to deduct part of the property tax as a business expense.”