The Tax Cuts and Jobs Act: What it Means for Homeowners

The National Association of REALTORS® (NAR) worked throughout the tax reform process to preserve the existing tax benefits of homeownership and real estate investment. While some benefits of homeownership are diminished, NAR maintains that the final legislation will benefit many homeowners, homebuyers, and real estate investors.

Most changes will take effect on January 1, 2018.

Tax returns filed during the spring of 2018 (for the 2017 tax year) are not generally affected. But knowing about these changes now will help taxpayers plan and understand how the TCJA could impact their take-home pay and their 2018 tax refund.

Tax Rate Reductions

  • The tax rate schedule retains seven brackets with slightly lower marginal rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The prior tax rate brackets were 10%, 15%, 25%, 28%, 33%, 35%, 39.6%.
  • The final bill retains the current-law maximum rates on net capital gains (generally, 15% maximum rate but 20% for those in the highest tax bracket; 25% rate on “recapture” of depreciation from real property).

Exclusion of Gain on Sale of a Principal Residence

  • The final bill retains current law. A homeowner is required to live in their home 2 out of the last 5 years, instead of the proposed 5 out of the last 8 years, to qualify.

Mortgage Interest Deduction

  • Interest on a new home mortgage is limited to interest paid on a maximum of $750,000 of a new mortgage taken out after December 14, 2017. Current loans of up to $1 million are grandfathered and are not subject to the new $750,000 cap.
  • Taxpayers with a mortgage taken out before December 15, 2017 can continue to claim home mortgage interest on up to $1 million. The $1 million limit continues to apply to a refinanced mortgage incurred before December 15, 2017, and requires that the new loan does not exceed the amount of the mortgage being refinanced.
  • Interest on a home equity loan is no longer deductible unless the proceeds are used to substantially improve the residence.
  • Interest remains deductible on second homes, subject to the $1 million/$750,000 limits.

Standard Deduction

Many taxpayers who previously itemized deductions will now claim the standard deduction instead.

  • The final bill provides a standard deduction of $12,000 for single individuals and $24,000 for joint returns. The new standard deduction is indexed for inflation.

Individuals should consult a tax professional about their own personal situation.

Source: National Association of REALTORS and www.hrblock.com

 

The Hidden Costs of Homeownership

If you’ve never owned your own property before, there are some costs of homeownership you should prepare yourself for ahead of time. Should you take out a mortgage, you’ll have your monthly mortgage payment, but often there are additional costs and fees added that a new homeowner will not expect. Listed below are items you should expect to pay once you become a homeowner.

Property Taxes

Costs of Homeownership

When you rent, you are not responsible for the property taxes on the property. But when you become a homeowner, you’re expected to pay yearly property taxes, of which go to public works, wages for government workers or public school boards. Based on the current value of your home, property taxes are assessed every year and will likely change to reflect an increase (or decrease) in your home’s value. Property taxes can be paid at one time, or they can be divided into 12 payments over the course of a year and added to your mortgage payment. When you’re trying to determine what your mortgage payment will be each month, don’t forget to factor in property taxes.

Home Maintenance

When you live in a rental property, most maintenance is performed by the landlord or Costs of Homeownershipa property manager. When you become a homeowner, those maintenance costs fall upon you. When you purchase a home, all maintenance items should be considered when it comes to your overall budget. Will you want to replace all the appliances? Will the property need new windows or a new roof? Does the home need basic upgrades? Most people in the industry suggest you allocate 1% of your home’s worth for maintenance costs every year, but the reality is that 1% is likely the minimum – you should plan on more than 1% maintenance costs each year as a homeowner, and if you plan on any larger renovations, bet on the costs to be even higher.

Mortgage Insurance

Most people, when they buy a home or property, are able to do so by taking out a mortgage loan. If you put less than 20% of the cost of your property down, you’re required to have Private Mortgage Insurance (PMI). PMI protects lenders if the borrower defaults on their loan. PMI is charged annually, and it will typically cost 0.5% to 1% of the entire loan amount. The payments are generally paid each month rather than in a large one-time payment. If you plan on taking out a mortgage loan, and you don’t have 20% to put down, expect to add private mortgage insurance payments to your other monthly bills.

Supplemental Insurance

Supplemental Insurance_Costs of HomeownershipDo you live in an area prone to natural disaster? As a homeowner you’ll need to have regular home insurance to protect your home or property from typical things (plumbing issues, roof leaks, etc.) that homeowners encounter. Should you live in an area that’s prone to weather-related issues (floods, tornadoes, earthquakes, hurricanes) you will want to purchase supplemental insurance to make sure your home is covered should nature decide to show herself.

Landscaping and Lawn Care

When you rent a condo or an apartment, it’s highly likely you are not spending a lot of time outsideLandscaping and Lawn Care_Costs of Homeownership in a yard. When you buy your own property (should it have a yard or some kind of outdoor area), expect some hidden costs to come in the form of lawn care. Does the yard need some major landscaping? Are you going to mow it yourself, or will you hire a company to do it? Do you have a lawn mower, rakes, snow or leaf blower, yard tools, shed, and any other items needed to keep your yard looking great year-round? A yard comes with extra costs, so be sure to know how much you want to spend on upkeep per year.

HOA Fees

If you’ve been renting your previous residence, it’s likely you haven’t had to pay Homeowners Association (HOA) fees for your apartment or rental. Should you buy a house, condo or townhouse in a neighborhood with common areas, a clubhouse, pool, or any other kind of community meeting places, it’s likely you’ll move into a neighborhood with an HOA. HOA fees can vary in terms of what the HOA covers within the community, but unless you know through your Realtor or through the homeowner the monthly fee, you can expect to spend anywhere from $10 to hundreds of dollars per month on HOA fees.

Buying your first home or property is a huge step in anyone’s life. Before you start your property search, make sure you consider all of the items above when you’re thinking of buying a home or property and during your property search.