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).