Tax reform and the impact on your mortgage

Learn how tax reform will impact mortgage interest deductions, property tax deductions, and the housing market in 2018.

tax reform and your mortgage

The Tax Cuts and Jobs Act (TCJA), enacted in December 2017, could have significant implications for some homeowners in 2018. For most consumers, the TCJA will lower some consumers tax liability.

When it comes to homeownership, there are potential changes in the deductibility of mortgage loan interest and state and local taxes. How these changes affect you and your homeownership costs will depend on your personal financial situation and where you live.

Impact 1: Mortgage interest deduction

The TCJA changes the way you can deduct interest paid on home loans on your income tax returns, which may increase the cost of homeownership for some.

For mortgages taken out after December 15, 2017, interest is only deductible on loan balances up to $750,000 used to buy, build, or improve your primary home or a second home.

For mortgages originated before December 15, 2017, interest will be deductible based on the old rules — you can deduct interest on up to $1 million of mortgage debt.

Understandably, this new rule impacts homeowners in areas of the country with expensive real estate. According to ATTOM Data Solutions, nearly 64% of mortgages on homes sold in New York City in 2017 cost more than $750,000, and 58% of 2017 home loans in San Francisco exceeded the new cap.

Impact 2: Property tax interest deduction

The TCJA limits deductions for state and local taxes, including property taxes you might pay on your home, up to $10,000. Before 2018, property taxes were fully deductible. This is more likely to affect people in high-tax states.

Impact 3: The housing market

The effects of the TCJA on the overall housing market are likely to be limited, but some people and communities could feel significant changes.

Reductions in corporate tax rates will make it less attractive for companies to build affordable housing using the Low Income Housing Tax Credit, because the value of that credit will be reduced. That may push rents higher and create a tighter inventory of homes — and higher prices — for first-time homebuyers.

However, overall in 2018, there will be bigger impacts on the housing market from a growing economy and rising wages. New home sales, home construction, and housing prices are all expected to rise in 2018.

Of course, you should keep in mind that the individual tax provisions of the TCJA aren’t permanent. They’re set to expire in 2025, unless Congress renews them.

Written By: Mark Tosczak

You should consult your own tax advisor regarding your tax implications.