Financial Fitness

Tax Reform for Homeowners: 3 Important Impacts

Homeowners should be aware of three important tax reform changes for 2018 and beyond.

by Heather Johnson - June 04, 2018

The Tax Cuts and Jobs Act that Congress passed in December 2017 reduces real estate tax breaks for homeowners that many homeowners have come to rely on. New homeowners and those with larger mortgages will notice changes to mortgage interest deductions.

In addition to tightened tax deductions, homeowners may notice a shift in real estate prices. The National Association of Realtors projects 1% to 3% slower growth in home prices in 2018 due to tax reform. High-cost, high-tax areas may notice a decline due to new tax restrictions.

Here are three big impacts of the tax reform that homeowners should know about:

1. Mortgage interest deduction

Depending on the loan amount, new homeowners may need to take a smaller tax deduction under the new law.

Old law: You can deduct mortgage interest on loans up to $1 million ($500,000 if married filing separately).

New law: For homes bought on or after December 15, 2017, you can deduct mortgage interest on debt up to $750,000 ($375,000 if married filing separately).

If you refinance, the former $1 million limit applies, provided the new loan doesn’t exceed the amount of the existing mortgage.

The above limits apply to the combined interest related to your primary home and a second home.

2. Property tax deduction

The new tax law may offer less relief to homeowners in high-tax areas.

Old law: You can deduct property taxes on real estate you own.

New law: You can deduct property taxes on real estate you own; however, the total amount of tax you deduct — including property taxes, state and local income taxes, and/or sales taxes — can’t exceed $10,000.

3. Home equity loans and lines of credit

If you take out a home equity line of credit (HELOC) to finance home improvement, not much changes under the new tax law. If you use a HELOC for other reasons, you may lose that deduction.

Old law: You can deduct interest on up to $100,000 of home equity debt.

New law: You can deduct interest on a home equity loan, HELOC, or second mortgage only if it’s used to “buy, build, or substantially improve the home,” according to the IRS.

Heather Johnson writes about small business, finance, real estate, and other topics from Oakland, California.

Image by iStock

Additional Resources

Get tax-planning strategies plus analysis from Wells Fargo Investment Institute on what the new law may mean for investors.

Learn five simple tips to help increase your home’s value.

Wells Fargo Advisors and its affiliates do not provide legal or tax advice.