Tax considerations have long been an important part of homeownership. And that’s largely thanks to the various tax benefits designed to encourage home ownership among taxpayers. In fact, home buyers often consider potential tax benefits when they decide to purchase a home.
The Tax Cuts and Jobs Act of 2017 changed many of the rules of the game, however. Here’s what you need to know about homeownership and paying taxes in 2019.
You may no longer need to itemize your deductions.
That may seem like heresy to those who have deducted home mortgage interest and property taxes for years. Or maybe you were considering buying a house with the expectation of taking itemized deductions as an important part of the decision to do so. But most taxpayers in 2019 no longer need to itemize their deductions, which is due to the standard deductions just about doubling for every tax filing status.
That doesn’t mean you’re not still getting the benefit of a deduction or that your taxes will go up. In fact, if your standard deduction is now larger than your previous total itemized deductions, you shouldn’t think of it as “losing” a deduction at all. You’re just getting a larger standard deduction instead.
Itemized deductions for state and local taxes paid (SALT) are limited.
Starting with the 2018 tax year, you could only claim itemized deductions for up to $10,000 per tax return for state and local taxes, such as sales tax and real estate tax. For taxpayers in high tax states, that’s a significant cut.
The cap is $10,000 for every return, whether you file as Single or Married Filing Jointly, or with another filing status. The only filing status with a different limit is Married Filing Separately, which has a cap of $5,000.
You can choose the Simplified Method for home office expenses.
It’s been around a few years, but the Internal Revenue Service (IRS) now allows you to take a deduction for an office in your home without all the pain of adding up and allocating expenses, like utility bills, rent or mortgage interest, and depreciation, to your home office space. Instead, you can just enter the square footage of your qualifying home office space, and take a deduction worth $5 per square foot on up to 300 square feet, for a maximum deduction of $1,500. That’s called the Simplified Method.
You can still calculate your home office deduction as actual expenses if you want. You may get a larger tax deduction by doing so, especially if your home office area is larger than 300 square feet. In that case, you can claim whichever amount is larger.
Your HELOC interest may no longer be deductible.
You can now only deduct interest on your home equity loan (HELOC) if you used the proceeds to buy, build, or substantially improve your home. There is no grandfathered provision. If you already have a HELOC that you used for general household expenses, for example, you cannot deduct the interest under the new tax law.
If you did use your HELOC to buy, build, or substantially improve your home, however, you can still deduct the interest on up to $100,000 of equity debt.
Other mortgage interest may be limited.
You can only deduct interest on the first $750,000 of the home mortgage that you took out after mid-December 2017. To residents of most states, that may seem like a huge amount of money. However, in some parts of the country, $1 million buys a rather standard home. The limitation on mortgage interest deductions can be significant for buyers in those markets.
Refinancing a home with a cash-out deal won’t automatically make the interest deductible anymore, either, due to new limitations.
The capital gains exclusion on residences remains unchanged.
There was talk during the negotiations of the new tax law of changing the rules for taking an exclusion of gain from the sale of a home residence. That change didn’t make it to the final version. You can still exclude up to $250,000 ($500,000 if filing jointly) of gain from the sale of your house if you owned and lived in the home for two of the last five years, and you meet other qualifications.