One of the major news stories of 2017 is likely to be the passage of legislation enacting income tax reform. The Tax Cuts and Jobs Act makes a number of changes to federal tax law, including a few provisions that affect the deductions available to homeowners. For most homeowners, however, the new law will have little or no effect on the ability to deduct mortgage interest and property tax.
The U.S. House of Representatives passed their version of the tax reform bill in November of 2017. The U.S. Senate passed its own version in December of 2017. Although the two versions have differences, a consensus bill is likely to be approved in conference committees and sent to the president for signing.
Prospective home buyers sometimes base their decision to buy a house partially on the resulting income tax deduction. The ability to deduct mortgage interest and property tax lowers your taxable income, indirectly reducing the cost of home ownership. The new regulations are not likely to affect the majority of homeowners, however, because the changes apply mostly to higher-cost homes.
The two legislative bills differ in their treatment of mortgage interest. The House version allows a deduction for mortgage interest on up to $500,000 in loan principal. The Senate bill maintains the current limitation, allowing an interest deduction on up to $1 million in mortgage principal. Either way, the interest on a mortgage under $500,000 remains fully deductible if you own just one single home.
If the House version of the bill is adopted, mortgage interest on a second home or a vacation home will no longer be deductible. The House version also eliminates the deduction for interest paid on a home equity loan.
The House bill and the Senate bill both propose to place a $10,000 limit on the deduction for property tax paid. As a result, the new limit on deducting property tax is likely to affect higher-cost homes, as well as homes in areas with high property taxes.
Effect of increased standard deduction
The tax reform legislation is likely to increase the standard deduction that may be claimed on your tax return. Tax filers can choose between itemizing deductions or taking the standard deduction amount. Mortgage interest is often the largest itemized deduction available to tax filers who itemize. The tax reform legislation may result in more tax filers choosing to claim the standard deduction instead of itemizing deductions.
If you are looking for a single-family home, there is no need to modify your home search in light of tax reform. Contact a real estate firm for assistance in finding your next home.