Have plans to purchase a home in 2018 but concerned about how the recently passed tax plan will affect you? First, congratulate yourself on getting this far. Strong work, you! Your financial planning and preparation to get all your ducks in a row, so to speak, will pay off. Second, take a breath and remain focused on your goal.
And to answer the question, for most of us, the new tax plan will not affect our home purchase in the New Year.
Here are some key takeaways from the tax plan to understand, consider, and hopefully, put you at ease as you navigate your dreams of homeownership.
As a homeowner, you will have the opportunity to deduct your mortgage interest from your annual income to reduce your overall tax burden. This is the great benefit of homeownership! And, fortunately, one that does not go away under the New Tax Plan (“NTP”).
We’ve all heard that the NTP is slashing the amount of mortgage interest you can deduct. While it is true, it begs an explanation. Previously, you were able to deduct mortgage interest on loans up to $1 Million in value across primary and secondary residences. Now, you can deduct mortgage interest on loans up to $750,000.
For most first time homebuyers, this change is irrelevant, unless you’re in the market for a home at a purchase price of $937,500 or more ($937,500 minus a 20% down payment yields a mortgage loan of $750,000). To give this some perspective, as of Year End 2017, the average home sale price in Center City Philadelphia was $518,000.
If you usually itemize your deductions, like a mortgage interest deduction, unfortunately this might be a thing of the past for many first-time homebuyers under the NTP. The new standard for itemizing deductions is doubling to $12,000 per year for singles and $24,000 per year for married couples.
With historically low interest rates, to reach mortgage interest deductions of over $12,000 annually, a single person would need to purchase a home for more than $375,000 (assuming a 20% down payment and mortgage loan of $300,000 at 4% interest rate on a 30-year fixed mortgage) to benefit from itemizing deductions. Doubling that amount to $24,000 for married couples would mean a purchase of a home for more than $750,000 (assuming a 20% down payment and mortgage loan of $600,000 at 4% interest rate on a 30-year fixed mortgage).
Another deduction impacted by the NTP is the real estate tax deduction. Previously, there was not a cap on real estate tax deductions against income. This was a great benefit for people purchasing in expensive ZIP Codes with real estate taxes to match.
Under the NTP, tax deductions are capped at $10,000 per year, inclusive of state and local income taxes. For those of us who live in Center City Philadelphia, this deduction includes your income taxes for Pennsylvania and City Wage taxes. This cap effectively is met relatively quickly as upwardly mobile professionals continue to earn. The best scenario is to consider a new construction home with a 10-year tax abatement to ensure you get the best benefit for the money spent. With these new caps, you should carefully consider where to purchase your new home.
Capital gains from the sale of real estate remains untouched at $250,000 for individuals and $500,000 for married couples.
As you can see, there are many things to consider when purchasing a home. To learn how the NTP specifically affects your situation, it’s best to discuss with your accountant and financial planner. A good real estate agent is the start to any home purchase and can make recommendations to these professionals, if you don’t already have them in your network.
As I always say, knowledge is power and that can make all the difference. Good luck!
If you are in the market to purchase a home this year, please reach out to our team for guidance! At VERY, we specialize in creating lasting and memorable experiences around buying a home. Our team prides itself on our market expertise, superior customer service and unmatched level of professionalism.