How tax reform may — or may not — affect your next move.

Mon, 18 Jun 2018

First home? New home? Dream home?

If you’re confused about how the 2017 Tax Cuts and Jobs Act could affect your home financing plans, you’re definitely not alone.

Lots of first-time and new-home buyers have been asking whether they can still deduct the interest they pay on their mortgage. And many of those dreaming of major home improvements want to know if a home equity line of credit (HELOC) or home equity loan still offers a tax-advantaged way to turn their dreams into reality. The short answer to both of those questions is still yes — as long as you meet certain qualifications.

1. You can still deduct your mortgage interest — if you can itemize your deductions. Under the new tax law, new home buyers will now be able to deduct interest on up to $750,000 of mortgage debt. One exception: if you got your mortgage before December 15, 2017, you’re grandfathered in at the old limits.

 
 

How much total mortgage debt is deductible if you can itemize

Mortgage date

For married/joint filers

For married, filing separately

December 15, 2017 or after

$750,000

$375,000

Prior to December 15, 2017

$1,000,000

 

$500,000

 

However, to claim this deduction, you’ll need to be able to itemize your deductions. And that may actually be less likely for more homeowners for two key reasons.

  • First, the standard deduction has roughly doubled to $12,000 for singles and $24,000 for married couples filing jointly. So your deductions would need to add up to more than $24,000 for you to be able to deduct your mortgage interest on an itemized list.
  • Secondly, the new deduction limit for state and local taxes may make it harder for you to exceed the standard deduction. That deduction — which was the most common itemized deduction— is now capped at $10,000.

So if you don’t have a lot of deductions to claim, you may find it easier to file your taxes — but harder to itemize and deduct your mortgage interest.

2. You can still deduct the interest on your home equity financing — if you itemize your deductions and use that money for home improvements. If you have enough total deductions to itemize, you can also still deduct the interest on a home equity line of credit (HELOC) and a home equity loan — depending on how you use that money.

The rules are stricter now. For your HELOC or home equity loan interest to be tax deductible, you can only use those funds to pay for “substantial improvements” to the home that’s securing that loan. That can include improvements like remodeling the kitchen, replacing its roof, or building a new addition.

If you use these funds for other things — like paying off your credit cards, consolidating other debt, funding college, supplementing your retirement income or even buying a vacation home — that interest is not deductible.

Keep in mind, too, that the $750,000 mortgage debt limit mentioned earlier applies to your total home-related financing — which includes your home mortgages as well as any HELOC or home equity loans.

Now that you know how mortgage-related deductions changed under the new tax law, what steps should you take next? Of course, that depends on what matters most to you.

How important is the tax deduction to you? Most people don’t buy homes just for the tax deduction. So the itemized deductibility of your interest may not be a deciding factor in your next move…especially when you consider that the standard deduction has now been doubled. If not, focus on the house you want, and work with a knowledgeable banker to get the right mortgage for you.

Is upgrading your existing home now more attractive? In many areas of the country, the housing market has rebounded — driving home values up significantly. You may find that you’ve built up more equity in your current home than you realize. If you can’t find the ideal new home — or don’t want to move to a new area with higher property taxes that are now capped at a $10,000 deduction — consider tapping into that equity to turn your existing home into your dream home. Ask your banker how you can fund those improvements at relatively low interest rates with a home equity loan or line of credit.

Do you need new plans for longer-term goals? Some families were hoping to eventually tap into the equity in their homes to help fund their children’s college tuition or their own retirement expenses. But remember, the new tax law prohibits you from deducting the interest on home financing when used for anything other than substantial home improvements. Ask your banker to outline other effective ways you can save for those longer-term goals. Whatever your situation, your Webster banker is here to help. Whether you’re in the market for your first home, a new home, or your dream home, we’ll streamline your next steps. Together, we’ll make sure you’re not blindsided by any surprises and that you’re fully aware of all your options — so that you can move forward with confidence!

All lines and loans are subject to credit approval. The Webster symbol is a registered trademark in the U.S. Webster Bank, N.A. Member FDIC. Equal Housing Lender © 2018 Webster Financial Corporation. All rights reserved.

Sources: Interest on Home Equity Loans Often Still Deductible Under New Law, February 21, 2018, IRS.gov. New Rules and Limitations for Depreciation and Expensing Under the Tax Cuts and Jobs Act, April 2018, IRS.gov.

For the latest information on the Tax Cuts and Jobs Act, please visit IRS.gov.