I Bought a Home Last Year. Do I Get a Tax Deduction?

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The answer to that question is yes – but it may be limited based on your situation. Due to the tax reform law passed in December 2017, you can still take tax deductions for certain expenses related to home ownership. However, with the new laws, those deductions may not be as valuable as they once were.

Mortgage Interest & Real Estate Taxes are Still Deductible

The two biggest tax deductions related to home ownership are mortgage interest and real estate taxes. Both are still deductible under the new tax law, but they have been limited by aspects of the new law.

Mortgage Interest Deduction is Lower

The deduction still exists, but it is lower. Under the old tax law, you deduct interest paid based on a mortgage of up to $1 million if the loan was to purchase, build, or improve your home. Under the new tax law, you can deduct interest based on a mortgage of no more than $750,000. That’s a 25% reduction, and it applies to all home loans originated after December 15, 2017. Loans that were originated before that are subject to the old law.

There’s been some confusion over home equity loans and home equity lines of credit. Interest is still tax deductible when used to purchase, build, or improve the home. However, it is no longer deductible if the loan proceeds were used for purposes other than the home.

Real Estate Taxes Deduction is Lower

Similar to mortgage interest, real estate taxes are still deductible but also lowered. Prior to 2018, the real estate tax deduction was virtually unlimited. If you claimed itemized deductions, most tax filers would claim all of their real estate taxes.

However, under the new tax law, the limit is $10,000 for married couples and singles filers. It’s $5,000 if you’re married, but filing separately. The limit applies to both real estate taxes and state and local taxes otherwise known as SALT. That means if you pay $4,000 in state income tax, your real estate tax deduction will be limited to $6,000.

The Standard Deduction is Much Higher

The new tax law increased the standard deduction to the point where it may not make sense for a homeowner to claim itemized deductions. You claim mortgage interest and real estate taxes as itemized deductions. For 2018, the standard deduction has been increased to $24,000 for married couples filing jointly, $18,000 for heads of households, and $12,000 for single filers.

Even though mortgage interest and real estate taxes can still be deducted, far fewer people will be able to itemize because the standard deduction has doubled. TurboTax estimates that about 90% of taxpayers will now take the standard deduction. Last tax season about 70% took the standard deduction.

Phase Out of Itemized Deductions was Eliminated

One bright side in the new tax law has been the elimination of the phase-out of itemized deductions for high-income households. With the phaseout gone, a high-income couple can purchase a $1 million home with a $750,000 mortgage at 5%. With a mortgage interest deduction of $37,500, plus $10,000 in real estate taxes (we’ll assume the couple lives in a state with no state income tax to make the math simpler), the total of $47,500 in home-related expenses will be fully tax deductible or at least to the extent it exceeds the $24,000 standard deduction.

High-income single filers benefit as well. Let’s say a single person earning $200,000 per year pays $20,000 in mortgage interest and $10,000 in property taxes. The taxpayer will be able to deduct the entire amount of $30,000. He or she will get the benefit of the amount that exceeds the $12,000 standard deduction for single filers, or $18,000. To summarize, you may still get a tax deduction if you bought a home in 2018.

No need to worry about knowing these tax rules. TurboTax will ask you simple questions about you and give you the tax deductions and credits you’re eligible for based on your entries. If you have questions, you can connect live via one-way video to a TurboTax Live CPA or Enrolled Agent with 15 years experience to get your tax questions answered. A TurboTax Live CPA or Enrolled Agent can also review, sign and file your tax return and they are available in English and Spanish year-round.

Comments (2) Leave your comment

    1. Hello Gail,

      The cash you take out is not considered taxable income. However, the interest on your refinance loan tax consequences have changed.

      Under the Tax Reform changes effective tax year 2018, you are only able to deduct the interest on loans used to purchase, build or substantially renovate your home. If the funds were used to take a vacation, etc, then the interest may not be deducted as an Itemized deduction.

      Thank you

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