The Tax Cuts and Jobs Act, enacted in 2017, was the first major change to the U.S. Tax Code in decades. Suddenly, what taxpayers had accepted as gospel all of their adult lives was no longer necessarily so. We have received many questions from clients wondering if the same choices that gave them a tax benefit in previous years were still worthwhile. One of the things about which we are frequently asked is the tax benefits of home ownership after tax reform.
Good news: there are still plenty of tax advantages to buying and owning a home in the era of the TCJA. Let's take a look at some of them.
If you are a homeowner, or are planning to be, the mortgage interest deduction is important to you. So long as you itemized deductions on your federal income tax return, you can deduct the interest you pay on your mortgage during that tax year.
In order to be deductible, the interest paid must be on a loan secured by your home. The loan proceeds must have been used to build, purchase, or make substantial improvements to your home.
If your loan was incurred prior to December 16, 2017, you can deduct up to $1,000,000 of home acquisition debt if married and filing jointly, and $500,000 if married filing separately. Loans incurred after December 15, 2017 are eligible for deductions of up to $750,000 for married couples filing jointly, and $375,000 if filing separately.
The mortgage interest deduction is also available if you take out a home equity line of credit (HELOC) or loan for the purpose of buying, building, or making substantial improvements to a home. However, the new tax law has eliminated a separate deduction for interests on such loans used for other purposes.
You may remember, prior to the TCJA's enactment, that there was concern that the deduction for real estate property taxes might be eliminated. Fortunately, that deduction is still generally available to taxpayers who itemize. For the years spanning 2018 to 2025, this deduction is capped at $10,000 for married taxpayers filing jointly, or $5,000 for those filing separately. This cap includes all state and local taxes, not just property tax.
You should also be aware that if you are subject to the alternative minimum tax (AMT), there is no deduction allowed for property taxes or any other state or local tax.
Making improvements to your home might seem like something that qualifies for a tax deduction, but unfortunately, it's not—except in the rare case of medical necessity, such as adapting a bathroom for someone in a wheelchair.
The good news, though, is that making improvements to your home may increase your tax basis in the property. As a result, if you sell the property down the road, any taxable gains may be decreased as a result.
Points are fees paid directly to the lender on your home loan at the time of closing, in exchange for a reduced interest rate. When you purchase your primary residence, you might be able to deduct what you paid for points in full in the year you paid them, so long as you meet certain requirements, and, of course, if you itemize on your taxes. You might even be able to deduct points paid by the seller.
If you are refinancing, things work a bit differently. Rather than being deductible in full in the year paid, points paid on a refinanced loan are usually deductible on a pro-rata basis over the life of the loan. A possible exception is if the refinance is in order to make improvements to your primary residence. In that case, you may be able to deduct points in the year in which they were paid.
Aside from points, closing costs in general are not deductible on your taxes. However, like home improvements, they may increase your tax basis in the property, and therefore might lower your taxable gains if you later sell.
If you sell your primary residence at a gain, good for you! Not only have you made money, you might also be able to exclude at least a part, and possibly all, of that gain from federal income tax. In order to qualify, you would need to have owned the home and used it as your principal residence for a period totaling two of the five years immediately preceding the sale.
Even if you don't meet that requirement, all may not be lost. If you had to sell your home because of health issues, a job change to a different location, or certain other reasons, you may still be able to partially exclude some gain from taxation.
Even though the TCJA has made significant changes to the tax landscape of the United States, there are plenty of benefits of home ownership after tax reform. We invite you to contact our law office to schedule a consultation to make sure you maximize them.
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