The Buyer's Guide: How the Tax Law Effects Mortgages

The new tax reform passed late last year will largely go into effect in 2018, meaning that it will affect your income and expenses used to file your 2018 tax return in 2019. One of the primary updates to the reform is how the mortgage interest deduction has changed. Some details below to help you navigate through the new laws. 

 Photo by  STIL  on  Unsplash

Photo by STIL on Unsplash

THEN

Currently, if you itemize your deductions, you can deduct qualifying mortgage interest for purchases of up to $1,000,000 plus an additional $100,000 for equity debt. The $1,000,000 cap applies to a mortgage on your primary residence plus one other home.

NOW

Under the conference bill, new mortgages would be capped at $750,000 for purposes of the home mortgage interest deduction. For mortgages taken out before December 15, 2017, the limit will be $1,000,000. Beginning in 2026, the cap will also be $1,000,000, no matter when the debt was incurred (confusing, I know). Additionally, the deduction for interest on home equity debt (meaning re-fis not related to improving your home) will be eliminated beginning in 2018 - but it will return in 2026.

Under the House bill, existing mortgages would have been grandfathered and new mortgages would have been capped at $500,000, while under the Senate bill, the deduction would have remained in place for mortgages up to $1,000,000 but the deduction for equity debt would have been eliminated.

Source, Forbes.com

EXAMPLES 

First-time buyers: Based on $100K income and a $437K home the federal tax-incentive to own vs. rent drops from $3,291 to zero in the first year.

Typical buyers: Based on $120K income and a $533.5K home the federal tax-incentive to own vs. rent drops from $5,782 to $362 in the first year.

Mid-range buyers: Based on $150K income and a $615K home the federal tax-incentive to own vs. rent drops from $8,099 to $1,334 in the first year.

High-end buyers/SF/LA Metro Buyers: Based on $200K income and a $1.2M home the federal tax-incentive to own vs. rent drops from $16,615 to $5,725 in the first year.

Needless to say these figures are things you want to consider what you can afford when you invest into your home. (Source, CAR.com)