Income taxes can be filed using the standard deduction or itemized deductions. Most homeowners prefer itemized deductions to reduce their taxable income by what they've spent on mortgage interest, property taxes and more. It does take more time to gather all the paperwork needed to support itemized deductions and it's usually worth it. In this article, we look at how home ownership is treated by today's tax code. We follow with a comparison of today's rules versus tomorrow's proposed tax changes, to help you understand what's at risk … the elephant in the room!
If you've been listening to the news lately, you know that the proposed tax changes were just released. There are some really scary headlines out there. As my mission is helping women homeowners make smart homeowner decisions, it was to research and share the proposed tax changes here. If you're not sure of your current tax situation, LearnVest.com has an article to help you find out if itemizing can save you on taxes.
Today's (2017) Tax Benefits of Home Ownership
When you buy a house, hopefully you look at the total cost of home ownership to figure out how big a mortgage you can afford. It's also possible that you've looked at how much you can reduce your incomes tax because you're able to write off several homeowner expenses. But in case you've never done this, here's an overview of what you can deduct:
- Mortgage interest deduction – means you can deduct all interest paid on mortgages up to $1,000,000 in mortgage debt. We're also able to deduct home equity interest on loans up to $100,000, even though this money maybe used on things unrelated to the house.
- Property tax deduction – like the mortgage interest deduction, enables homeowners to deduct all property taxes paid on their home. Some people feel that states and local government by imposing property taxes, are getting a subsidy from the federal government.
- Imputed rent – is different from the mortgage interest and property tax deductions. It's the rent homeowners would have needed to pay to rent their home. It's how this same rent would be treated if you were a:
- Renter who doesn't get to deduct the rent paid for their home.
- Landlord who has to count as income, the rent received from renters.
- Home sale profits – are the tax savings gained when selling your home at a profile. Homeowners can exclude up to $250,ooo ($500,000 for joint filers) of their capital gains on a principal residence if they lived in the home for two of the five preceding years.
To learn more about home ownership and taxes, check out the TaxPolicyCenter.org's website.
How Proposed Tax Changes Affect Homeowners
Lots of people are trying to make sense out of the proposed tax changes, focusing on who are the winners and losers. Of course the housing industries, home building and real estate, appear to be the biggest losers. According to Forbes, these tax changes “… would eliminate the tax incentive to buy, turning America into a nation of renters and putting pressure on home values. Already the homeownership rates (US Census data) is near an all-time low at 63.7%.”
From my perspective, homeowners living in states with ridiculously high home values like New York and California (brown states above), will suffer far more. That's because the $250,000 house in Oklahoma probably costs $750,000 in New York and more than $1,000,000 in California. The National Association of Home Builders says that 34 million homeowners who now benefit from today's exemptions, will drop to 10 million with the new tax plan (check the numbers out for your state by clicking here for interactive version of map above).
|Homeowner Expenses||Deductible in 2017||Proposed Tax Changes|
|Mortgage Interest Deduction||Interest paid up to $1,100,000||Reduce interest cap to $500,000|
|Property tax deduction||Full amount paid by homeowners||Reduced to no more than $10,000|
|Home sale profits||$250,000 / $500,000 exempt|
if you live in home 2 of last 5 yrs;
limit of 1 sale every 2 yrs
| $250,000 / $500,000 exempt|
if you live in home 5 of last 8 yrs;
limit of 1 sale every 5 yrs
Here are just a few of the harmful ways the proposed tax changes will affect home ownership.
- 20 million homeowners will consider renting versus buying their home. While this might seem attractive up front, they may not realize how paying a mortgage is another form of saving for retirement. This includes both your down payment and the principal paid monthly.
- Homeowners who haven't rented for a while may not recognize the pitfalls of rising rents they can't control (learn more about Housing Costs vs Cost of Living). You're more vulnerable to unplanned changes like the landlord selling the property and forcing you to move. Today's problems will be compounded by a rental market that is much more volatile as more renters enter the market, outstripping the supply of rental houses.
- What middle class homeowners lose is exempt for real estate investors (Trump and his friends). In the Forbes article, what the Republica Tax Bill Means for the Value of Your Home, explains “… At the same time as the plan cuts back on deductions for individual homeowners, it exempts real estate investors from a new 30% limit on interest deductibility for businesses. “This tax plan would turn America from a nation of property owners into a nation of tenants renting from private equity-backed landlords,” argues Vishal Garg, CEO of Better Mortgage.”
- The elephant in the room is how much home values will drop because of these tax changes. The Nationals Association of Realtors in it's early modeling is predicting a 10% drop in home values, with higher losses in high tax states (not sure if this means property taxes).
- Boomers beware! The tax changes proposed will eliminate all deductions for vacation homes which is a huge impact if you were planning to buy one (not sure about vacation homes you already own).
Thanks for sharing such a useful article, I am definitely pinning this for future reference.
Thanks for sharing. I’m sure we will suffer here in Hawaii as well then. The value of our homes is astronomical!
Mal, You’re right & guess you’re so small (population that is) that we don’t always remember. I’m guessing your home prices are a lot like California but how about property taxes?
Thanks Tina for this useful article! Your tips are very helpful!
Wow, that was like deja vu as I used to own your domain, and then life happens so good luck with your online business.
OH well this is all a lot that I am just hearing, I will defiantly have to look into this more!
This is very helpful, I agree with many of the other comments. Anyone who is planning to buy a house definitely needs to read this. Sharing this with my friends and family.
Kristen from The Road to Domestication
Well, good news and bad news, I guess! All things tax-related really make me nervous…
Taxes are always a sore topic but at the end of the day it’s a necessary responsibility. Hopefully these changes are really beneficial.
Oh wow! Taxes are damn difficult to navigate especially for someone like me who has just started earning. Love your detailed post 🙂
It will be good for homeowners to do their research now and see if they’ll still qualify for the exemptions. It would be horrible to be caught off guard!
Liz, What’s interesting is that the new caps won’t be applied to existing homes, at least as far as the mortgage interest deduction. Not sure if the same is true for property taxes and that’s scary. When we bought our home in Portsmouth, NH in 1999 our taxes were around $3,000. One reason we left was escalating taxes (now over $13,000) and much of the money going to make the city a tourist destination … and less friendly for people who live there.
This will be the second year I’m filing for taxes, but I’m not worried about this for the time being! Lol. Thanks for informing me of tax changes. I wouldn’t have known otherwise!
Sabrina, Good you won’t be hurt by these changes & hopefully you’ll stay abreast of future changes so you’re not surprised when they do impact you.
My house is just about paid off so no worries for me. This will be a bummer for many.
Tara, Congrats on paying off your mortgage & as long as you’ve got low property taxes you should be fine.
I live in Canada and our real estate prices here in the more rural areas of the east coast have been falling steadily. Great if you’re purchasing, not so great if you are selling!
Monica, Hope you’re not selling if prices are falling. It truly is amazing how forces beyond our control or even understanding, can significantly impact our lives. Good luck to you in Canada & at least you don’t have to worry as much about health care.
Maria M Muto-Porter
Anyone who owns a home – or plans to – needs to read this. And then write, email or call their congressperson or senator! Good, clear information!
Maria, You understand what’s happening & yes, we need to voice our concerns with elected officials.