How Tax Reform Has Changed Tax Planning for Homeowners

It's no surprise that the Tax Cuts and Jobs Act (TCJA) has made sweeping changes to the U.S. tax code. In doing so, it's also altered deductions and other tax breaks for individuals, particularly for homeowners. If you own a home or property, the ways in which you usually time your income and deductions may no longer give you a tax advantage.

DS+B Team August 16, 2018

Here’s how the TCJA could affect your 2018 tax planning.

New limits on state and local tax deduction, including property tax
The TCJA places new limits on your entire deduction for state and local taxes: $10,000, or $5,000 if you’re married and filing separately. This includes property tax and either income or sales tax.
Reductions to mortgage interest deduction
The TCJA has reduced the mortgage debt limit from $1 million to $750,000 for debt incurred after Dec. 15, 2017, with limited exceptions. The limit applies to interest on mortgage debt incurred to purchase, build, or improve your principal and secondary residences, and potentially to points paid related to your principal residence as well.
Redefined limits on home equity debt interest deduction
Previously, individuals could deduct the interest on up to $100,000 of home equity debt, regardless of what it was used for. Although the TCJA hasn’t eliminated this deduction, it has considerably narrowed it. Now, individuals may only deduct the interest for home equity debt that qualifies for the home interest deduction. In other words, the home equity debt (i.e., the loan) must be used for expenses related to home improvements for its interest to be deductible.
New tax breaks:
The TCJA ushers in a few perks for homeowners, too. New tax breaks include the following:

  • Rental income exclusion that excludes individuals who rent out all or a portion of their principal or secondary residence for fewer than 15 days from having to report the rental income.
  • Home sale gain exclusion that allows individuals who sell their principal residence to exclude up to $250,000 of gain ($500,000 for married couples filing jointly) if they meet certain requirements.
  • Home sale loss deduction that applies to individuals who rent out or use part of their home for their business. If they sell at a loss, the portion of the loss attributable to the space used for business may be deductible.

Be aware of other changes that could impact your 2018 tax planning

While many of the changes ushered in by the TCJA will primarily affect your home-related tax deductions, there are plenty of others that could impact your charitable donations, medical expense deductions, tax-advantaged saving for health care, and even your alternative minimum tax liability. The TCJA has also suspended personal exemptions for 2018-2025 while introducing an increase to the child credit and a new family credit.

If you haven’t already, now is the time to sit down with your tax advisor to determine how the TCJA could impact your tax planning for 2018 and beyond.