Tax Deductions for Homeowners After TCJA

Tax Deductions for Homeowners After TCJA

by | Accounting News, Construction, Estate Planning - Individual, IRS, News, Tax Planning - Individual

As the values of homes around the country continue to rise, as well as the cost of rent, home ownership looks more and more appealing. In the past, homeowners have been able to deduct certain expenses on their tax returns. Yet, with the Tax Cuts and Jobs Act of 2017 (TCJA), homeowners may no longer qualify for the deductions that were once beneficial in homeownership. Did you know that TCJA is the biggest tax overhaul seen in the USA in 30 years? If you’re curious about how this might affect homeowners, here are highlights of the federal tax deductions for homeownership under the TCJA.

Even with an increase in the standard deduction this year, many homeowners will continue to see some tax relief. While there will be a decrease in available itemized deductions, a few items that have been deductible in the past may still benefit taxpayers this year and beyond. Deductions such as home mortgage interest, state and local property taxes, and amounts paid at closing continue to be likely deductions while filing in 2019. We recommend you consult with one of our tax professionals to ensure that you are maximizing your tax savings as a homeowner. You can also consult the IRS Publication 5307 here.

  • Mortgage Interest Deduction – According to the TCJA, taxpayers can deduct mortgage interest paid on acquisition indebtedness up to $750,000. This deduction can also apply to a second property, so long as the indebtedness does not go above the $750,000. Home equity indebtedness is still deductible as long as the proceeds are used to buy, build, or improve the taxpayer’s home that secures the loan.
  • Mortgage Insurance Deduction – When a homeowner chooses not to or is not able to put down 20% or more in a downpayment, primary mortgage insurance (PMI) is required to protect lenders. As of now, certain amounts paid until the end of 2017 remain deductible. Congress is still deciding whether this deduction will be permanently eliminated.
  • State and Local Taxes – Taxpayers are now limited to a $10,000 itemized deduction for combined state and local taxes. Homeowners in states with high property and income taxes will face the most impact with this deduction limitation.
  • Amounts Paid at Closing – Origination fees, loan discounts, or prepaid interest are not usually deductible in the year that they are paid, but instead over the life of a home loan. However, they may be currently deductible if the loan is used to purchase or improve the home and if that home also serves as collateral for the loan.

Despite the new tax changes under the TCJA, it’s unlikely to be the deciding financial factor for those who have already bought a home or are considering homeownership in the future.  Some buyers may consider homeownership less attractive, which could result in lower home values and lower markets over time. According to Nolo, it is estimated that the tax benefits of owning a home will be less than in years past, putting many homeowners in the same place as renters.  At this time, there is no clear-cut solution that results in the best solution for homeowners, but with the right financial planning from our CPAs, homeowners can find the best ways to maximize their tax savings and cash flow.

How Student Loan Debt is Affecting First Time Home Buyers

by | Construction, News, Tax

2017 has been a more promising economic year including higher wages, a lower unemployment rate and booming markets. The housing market, however, has proven to be a stumbling block for many, particularly those looking to purchase their first home. This year has brought an increase in home prices and a decrease in available homes.

Although it seemed that new buyers were beginning to take their place in the market again, that ratio has dropped to a low 34 percent of overall home sales. In years past, first time buyers have made up closer to 40 percent of the overall market, but there seems to be a correlation between rising student loan debts and falling first time homeowners.

Of those who did purchase a home for the first time in 2017, 41 percent recorded they had student debt, and half of buyers owed at least $25,000. The average amount of student loan debt increased from $26,000 in 2016 to $29,000 in 2017 as well. Many said this increase in debt has hindered their ability to save for a down payment. Conversely, the average home cost hit a new peak in August at $282,000, which means down payment costs rose as well.

Not only are fewer buyers purchasing for the first time, but it seems that those who did paid more for less house. In 2016, first time buyers averaged a 1650 square foot home for $182,500, but in 2017, first time buyers averaged a 1640 square foot home for $190,000. Across all buyers, 42 percent paid the list price or more for their home, which is the highest in survey history.

Although it is possible to have student loan debt and still be approved for a mortgage, many first time buyers are afraid to even apply, fearing a stressful, long-winded process that will result in them not being approved.

However, the Realtor’s report did mention that more buyers said the mortgage application and approval process was easier than expected, a positive note in the mix of rising debt and home prices. Unfortunately though, mortgage rates are on the rise, so first time buyers may choose to consider waiting for the new year in the hopes that rates and home prices will drop, and hopefully their down payment savings will increase.