March 1, 2018
Honest to Goodness: Will new tax laws leave homeowners in Jeopardy?
To make understanding the new tax laws a little easier for those who are not tax experts (or don’t play them on TV), “Real Smarts” will post a series of blogs featuring Avidia’s tax expert, Angela Morrison, CPA, MSA, MST, and Partner at Huntington Tax Partners in Bedford. The following is part two in the series.
Real Smarts: “Angela, last time we spoke about what the new tax act means to individual taxpayers overall. Now, we want to up our tax knowledge game and ask about how tax changes will affect homeowners. That way, if our readers are ever on Jeopardy and get this category, they will really impress Alex.”
Angela: “Well, one of the biggest questions home buyers have surrounds mortgage interest deductibility. The new act lowers the mortgage interest deduction limit on acquisition mortgages to $750,000 (previously it was $1 million). Taxpayers with new mortgages greater than $750,000 will receive a pro-rated interest deduction. In addition, loans prior to 12/15/17 are grandfathered in to the $1mllion limitation. These limitations are going to affect taxpayer’s living in the areas of the country that really fuel the US economy.”
Real Smarts: “How about the deduction for real estate taxes? Is that going away?”
Angela: “It’s not going away, but state income taxes, real estate taxes, and personal property taxes are being capped at a combined total of $10,000. This is going to have a big impact on people living in high income tax states and high real estate tax cities/towns. Most taxpayers will easily reach this limitation. Real estate taxes on rental properties are still 100% deductible against rental income.”
Real Smarts: “One area of great concern is home equity interest. Is it true home equity interest is no longer tax deductible?”
Angela: “It depends on how the proceeds were used. If the proceeds were used to pay personal living expenses, such as tuition, credit card debt, or a new car, it is not deductible. If the proceeds were used to build an addition or renovate your home, it is deductible as long as the loan is secured by the home. If the loan is unsecured, the interest is not deductible. Under the old law you could deduct interest expense on $1M of acquisition debt and interest expense on $100k HELOC making the total $1.1M. It is unclear if the total loans will be $750k or $850k. The final rules and regulations have not been issued yet, but once they are we will let you know.”
Real Smarts: How will the act affect people who are thinking about buying a home this year?”
Angela: “Even though you may not receive a deduction for your interest expense and real estate taxes because of these new limitations, in most cases, owning a home is better than paying rent. The biggest reasons are you are building equity in the property as the loan is paid down and you benefit from the appreciation of the property.”
Real Smarts: “Is there anything else people should know about the laws and owning a home?”
Angela: “If you purchase a home in Massachusetts, make sure you file a Declaration of Homestead to protect your equity from certain creditors. If you already own a home, confirm one was filed. If it wasn’t, file one immediately. Section 4 of MGL Ch. 188 provides an automatic exemption available to everyone who owns a home and who occupies or intends to occupy the home as his or her principal residence. This exemption is for $125,000.00. Filing a written Declaration of Homestead at the Registry of Deeds for the county where the home is located increases that amount to $500,000.00. The key words in that are principal residence. This can only be filed for your principal residence, not rental units.”
Real Smarts: “Thank you Angela. Once again, you made a complex subject easy to understand. We have to ask, have you ever considered going on Jeopardy?”
Got tax questions? Real Smarts invites you to ask us on social media. As part of our tax series, we’ll pick a question from our readers and have Angela provide an answer.