Eleven Things to Know About Mortgage Interest Deductions for 2018

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With the passing of the Tax Cut and Jobs Act, a lot is about to change financially for citizens in the United States. One of the ways is how it will reflect financially for homeowners. Although this tax cut is for 2018 (meaning citizens won’t see changes until February of 2019), there will still be a dramatic change for U.S. homeownership. For a summary of things you need to know follow this link:  2018 Mortgage Interest Deductions

Buying a home in 2018? Here’s what you need to know.

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Homeownership can be a costly endeavor, especially since certain tax breaks are now less generous. Here are a few things to be aware of if you’re planning to go from renter to owner this year.

If you’re thinking of buying property this year, here are a few points you need to be aware of.

1. Your housing costs shouldn’t exceed 30% of your take-home pay

Regardless of how the recent tax changes end up impacting you, a homeowner’s housing costs should never exceed 30% of take-home pay. Different folks have their own interpretations of what peripheral expenses that 30% threshold should encompass, but at a minimum, it should cover known costs like property taxes and homeowner’s insurance. For better protection, however, I’d recommend that that 30% mark include maintenance, as well.

The typical U.S. homeowner spends anywhere from 1% to 4% of their home’s value on maintenance each year. If you’re buying for the first time, there’s no way to know where you’ll fall in that range, but if you aim for 2.5% — smack down the middle — and are looking at a $400,000 home, that’s roughly $833 per month in maintenance.

If you then take that $833 and add it to your monthly mortgage payment, property tax payment, and homeowner’s insurance payment, your total should not be greater than 30% of your monthly income. If it is, you’re leaving yourself with limited wiggle room for unplanned expenses that may arise in the future.

2. You can still deduct your mortgage interest — to a point

The mortgage-interest deduction has long been criticized for favoring the rich, and so some legislators have been arguing to eliminate it for years. Thankfully, this key deduction is still intact for the current tax year — albeit at a lower threshold.

It used to be that you could deduct interest on your mortgage for loans valued at up to $1 million. But as a result of the new tax changes, that limit has been lowered to $750,000. If you’re an average earner looking to buy a modest home, you should be able to deduct your mortgage interest in full. But if you’re looking at pricier homes, or live in an expensive area of the country where home prices are inflated, you may want to be more cognizant of that cap.

Of course, if you’re not planning to itemize on your tax return, there’s no need to worry about the mortgage interest deduction, or any deduction, for that matter. As it is, the majority of taxpayers don’t itemize, and since the new tax rules effectively double the standard deduction, it’s estimated that fewer filers will do so going forward. But if your intent is to itemize, then be aware of the aforementioned limit.

3. Your property tax deduction may be capped

Just as the new tax laws limit the mortgage interest deduction, so, too, do they limit the extent to which you can deduct property taxes. In fact, going forward, your total SALT (state and local tax) deduction maxes out at $10,000, whereas prior to 2018, it was unlimited. If you’re thinking of buying a home in a low- or no-income tax state, and you don’t expect your property tax bill to be particularly high, then the $10,000 cap won’t impact you. But if you’re buying a home in, say, New Jersey, which boasts the highest property taxes in the nation, you may come to find that a portion of your property tax bill is non-deductible.

Again, if you’re not planning to itemize on your tax return in the first place, then there’s no need to worry about this change. But one thing you should be aware of is that some experts say that home values may soon start to drop as a result of the new laws, since, by taking away a portion of the tax breaks buyers once enjoyed, they make ownership less affordable in some parts of the country.

If you’re buying a home because you plan to live there for quite some time, this may not be too concerning. But if your plan is to buy a home, flip it, and unload it in a year or so, prices could start to fall when more buyers see their tax breaks go down and their tax bills go up.

Buying a home can be a wise financial decision that serves you well, not only at present, but for many years to come. Just be sure to know what you’re getting into before signing that mortgage.

~Maurie Backman, The Motley Fool

Will tax reform end the American dream of owning a home?

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If a U.S. tax reform measure targeting the popular mortgage interest deduction is adopted, values of homes could drop 10 percent on average nationally, Lawrence Yun told 20,000 real estate agents gathered for the National Association of Realtors conference last week.

Home owners would be leery of trading up to bigger, more expensive homes, because the cap would fall to $500,000 from the current $1 million, while renters would lose a tax benefit that could be a key incentive in the decision to buy, said Yun, chief economist of the real estate brokers group.

“This will greatly disincentivize buying homes,” he said. “There will steadily be fewer home buyers over time.”

The NAR is launching an offensive against the tax bill introduced last week by Republicans in the House of Representatives and anything similar that arises in the Senate. Finalizing a measure remains a long way off.

But real estate agents are worried. The potential change comes when many Americans still are reluctant to buy homes after the trauma of the 2008 housing crash, said Kenneth Rosen, chairman of Rosen Consulting Group. Home ownership remains near a 50-year low, with potential homebuyers still suffering from “post-foreclosure stress disorder,” he says.

Currently 63.9 percent households are homeowners, compared with the 69 percent pre-financial crisis.

Since a final tax change is a moving target that could disturb future housing prices, it may be prudent to put home buying on hold while awaiting clarity from Capitol Hill.

“If changes in your tax liability would make buying a house unfeasible, it probably would be worth sitting on the fence,” said Ralph McLaughlin, economist for Trulia, an online real estate service that is a unit of Zillow Group Inc.

BIGGER STANDARD DEDUCTION

To understand the potential impact, do not look directly at the mortgage interest deduction. Under the House plan, most middle class homeowners still will be allowed to take that popular deduction because the tax plan does not wipe it out for except for the portion of a mortgage over $500,000.

Still, the tax plan essentially renders the deduction worthless to the middle class, and that is what Yun expects to injure the housing market.

The reason for the mortgage deduction’s loss of power: a key part of the GOP tax plan almost doubles the standard deduction for taxpayers. Couples could claim a standard deduction of $24,400 rather than the current $12,700; singles could claim $12,200 rather than $6,350.

Instead of buying a house or scouring checking accounts for possible other deductions, a middle class taxpayer simply could claim a standard deduction that would protect a much larger chunk of income from taxes than current law provides.

With the higher standard deduction, the math turns the decision to buy or rent upside down from current conditions, said Trulia’s McLaughlin.

After a sharp rise in rents, buying has recently been a better deal in 100 of the nation’s largest markets. But the tax changes could make renting more economical, and real estate agents could find it more difficult to turn renters into buyers. Often the agents use tax deductions as a selling point when dealing with younger would-be buyers.

Eventually, however, there is potential for change and an improvement in housing market as young adults amass the down payments they have struggled to accumulate, McLaughlin noted.

In the association’s recent survey, about 25 percent of potential first-time homebuyers said amassing a down payment was a problem.

Renters who get an extra $11,700 each year from the higher standard deduction could sock away those tax savings, if they do not have to use it for student loans or decide on other purchases.

And homes could become more affordable if sluggish buying drives prices down. According to the National Association of Realtors, home prices rose 48 percent during the last six years, while incomes climbed just 15 percent. The nation’s median home price is $235,000.

For expensive homes, the standard deduction will be inadequate to make up for the mortgage deduction, and large families will face even more difficulty since the tax plan also takes away the $4,050 dependent exemptions for each person, according to McLaughlin.

“Realtors use the tax deduction to educate first-time home-buyers, and if they lose it, that could be detrimental for home buying,” said Elizabeth Mendenhall, chief executive of Re/Max Boone Realty in Columbia, Missouri and president-elect of the National Association of Realtors.

(The opinions expressed here are those of the author, a columnist for Reuters)

~Gail MarksJarvis, Reuters

Republican tax plan would hit Seattle, Eastside homebuyers dealing with pricey market

mortgage-calculator-tennesseeAspiring homeowners in the Seattle region, dealing with the hottest housing
market in the country, would be hit especially hard by the new GOP tax plan
unveiled Thursday.
The proposal would cap the federal mortgage-interest deduction at $500,000
for new-home purchases, down from the limit of $1 million. Basically, new
homeowners would only be able to deduct the interest on the first $500,000
of their mortgage.

This won’t impact most Americans because they don’t own homes that expensive. But it’s a big deal locally, where the median single-family houseselling today is worth $725,000 in Seattle and $855,000 on the Eastside.

Even with a regular down payment, lots of buyers here take out a mortgage
that’s over half-a-million dollars, and they would lose out on some of their
itemized tax benefits if the Republican tax plan passes.

The change wouldn’t apply to current mortgages — only new sales going
forward. And it wouldn’t impact anyone who takes the standard deduction,
which would nearly double under the tax plan, because the mortgage-interest
break is only used by people who itemize their deductions.

But the potential impact — combined with proposed limits on two other tax breaks, for home flippers and mansion owners — looks large. So far this year, 30 percent of all sold homes and refinances in King County used mortgages above $500,000. Looking at single-family houses, 36 percent of
new mortgages this year were above half-a-million dollars. Those rates are
likely to rise in future years as home prices here go up faster than anywhere
in the country.

More than 11,000 King County homebuyers so far this year took out a
mortgage over $500,000, including 4,500 in Seattle, 1,090 in Bellevue, 760
in Kirkland, 660 in Redmond and 560 in Issaquah, according to Attom. Most
of those are single-family houses, but also about 1,200 condos in Seattle,
mostly downtown.

Homes with mortgages over $500,000 made up half of new sales this year in
Sammamish, 35 percent in Bellevue, Redmond and Issaquah, and 29 percent
in Seattle. On the other end, less than 5 percent of new mortgages this year
topped half a million dollars in Tukwila, SeaTac, Kent and Des Moines.
The savings from the tax break can add up. Across the Seattle metro area, the
typical homeowner who used the deduction claimed $11,540 last year.
There are two other possible impacts from the tax plan that would serve to
make housing more unaffordable, said Windermere chief economist Matthew
Gardner.

First, homeowners could be less likely to sell, preferring instead to benefit
from their grandfathered tax credit on their current home. That would starve
a market of homes for sale at a time when inventory is at record lows.
Second, interested buyers might rush to purchase to be eligible for the tax
credit before the plan could pass, increasing demand during what is typically
a slow time of year. “The longer-term effects could be substantial,” he said.

He noted that homebuilders and other special-interest groups have or are
likely to come out against the plan, and called the proposal a “first stab at a
remarkably complex issue.”

The changes would impact people the most in the early years after they buy,
since mortgage payments initially are mostly interest, which is what the tax
break is used for.

Two other elements of the tax overhaul could cost local homeowners as well.
The proposal would also limit capital-gains-tax breaks on home sales.
Currently, homeowners can generally exclude from gross income up to
$500,000 profit on a home sale if they’ve used the house as a principal
residence for two out of the previous five years. The GOP proposal would
change that so the exemption would be applied only if people lived in the
home as their primary residence for five out of the prior eight years. And
they’d be able to use the exemption only once every five years, targeting
speculators and home flippers.

What’s more, the plan would cap property-tax deductions at $10,000. Most
locals wouldn’t be affected. The average homeowner in King County pays
about $5,600 in property taxes; even on expensive Mercer Island, the typical
tax bill is $8,800. But some owners of large homes have bills that top
$10,000; in Medina, the typical homeowner pays $15,200 a year in property
taxes, and on Hunts Point, where the typical home value tops $3 million,
homeowners pay $22,300 in property taxes.

~Mike Rosenberg, Seattle Times