Homebuying and Tax Deductions: What to Know This Tax Season

The first quarter of any new year holds tremendous potential. You’re cruising along with resolutions, you’ve put the holiday hustle behind you, and the warmer temperatures of springtime are just around the corner. Doesn’t it feel amazing? Except, what’s that nagging feeling? Something is ruining that sense of possibility. Something troublesome. Trouble starts with a “T,” and so does… taxes. 

Unless you’re a CPA, individual income tax returns probably aren’t something you look forward to. Tax season is a maligned time of year, and when you’re a new homeowner, Tax Day (Monday, April 15, 2019) can come with even more apprehension than usual. Will things change? Are there bigger and better deductions? Will you get a refund? Can you prepare them yourself? How does the new tax law change things? We spoke with several tax experts to help new homeowners know what to expect.

You’re a Taxpayer First and a Homeowner Second

Remember, Tax Day refers to individual income taxes. You can itemize for things like your mortgage and real estate taxes (more on that later), but your federal and state income tax returns are separate from the county and city real estate taxes you’ll be paying as a homeowner.

You’ll Likely Pay the Same or Less As a Homeowner—But It’s Not Just About the Money

“Homeowners tend to pay less in income taxes for the simple reason that their deductions from income are more than those who do not own homes,” says tax analyst Jeffrey A. Schneider of SFS Tax and Accounting Services.

Homeowners tend to itemize their deductions for things like mortgage interest and real estate taxes, which they’ve paid throughout the year. However, the Tax Cuts and Jobs Act, passed in December 2017, means that fewer filers can itemize. The standard deduction for all taxpayers almost doubled—it will be $24,000 for married couples filing jointly, $12,000 for individuals, and $18,000 for head of households for the 2018 tax year. 

“The new, higher standard deduction may be more than someone’s mortgage interest, real estate taxes, charitable contributions, etc.,” Schneider says. “As such, they won’t need to itemize and will be no different than a non-homeowner.”

Analyst Beth Logan of Kozlog Tax Advisers agrees that the new tax law has lessened the tax gap between homeowners and non-homeowners.

“Homeowners used to typically pay less in taxes but the new standard deductions will change that. Single homeowners are likely to pay fewer taxes than single renters, but married homeowners are less likely to see an advantage in owning a home when it comes to taxes."

Wait—is it just me, or is this making you think you shouldn’t have purchased a home? Not so, says Jai Kumar, marketing manager and tax associate at Prior Tax

“It’s not that homeowners pay less tax or more tax, but they have the ability to claim tax credits and deductions to which renters don’t have access. For example, homeowners can claim deductions for energy improvement and repairs toward the home.”

It’s not just money that separates renters from buyers. Joshua Zimmelman, president of Westwood Tax & Consulting concurs it isn’t a clear cut “more or less” answer.

“When it comes to taxes, there are so many factors way beyond homeownership that contribute to what you’ll end up paying,” Zimmelman says. “However, becoming a homeowner usually reduces your tax liability.”

You Can’t Get As SALT-y As You Used To

The new tax law also has an important acronym to keep in mind: SALT, which stands for “State and Local Taxes.”

Under the Tax Cuts and Jobs Act, the SALT deduction for real estate taxes is capped at $10,000, Schneider says. Under the previous law, individuals could deduct the full amount of their state individual income tax and local property taxes, which benefited high-income taxpayers more than anyone else. Now, itemizers are limited to deducting no more than $10,000, which could drastically reduce the number of people who use the SALT deduction. 

There’s Less to Itemize and Deduct Now

“Homebuying tax deductions are less likely with tax reform,” says Logan. “Because tax reform essentially moved the exemption deduction to the standard deduction, fewer filers can itemize.”

Although homeowners can still deduct mortgage interest, mortgage principal isn’t deductible, and the amount of home mortgage debt that itemizers can deduct has dropped from $1 million to $750,000. Moreover, interest paid on home equity loans and lines of credit (under $100,000) are no longer deductible unless they are used to buy, build, repair, or improve an individual taxpayer’s home.

PMI payments are no longer deductible either, although Logan notes this could change in the future through Congress.

Closing Costs Are Only Kind of Deductible

Unless a seller has agreed to pay all closing costs, that burden often settles on the buyer. Closing costs range from about 2 to 5 percent of a home’s purchase price and are due all at once, right at closing. For a $300,000 home, closing costs on the low end of 2 percent would still cost a buyer $8,000.

So, is all that money deductible on your individual income taxes? Not exactly, says Jacob Dayan, CEO of Community Tax

“You can claim a deduction for real estate taxes you paid as part of your mortgage closing costs capped at $10,000 for the tax year 2018. More specifically, you can deduct sales tax issued at closing, real estate taxes charged when you closed, mortgage interest paid when cost was settled, real estate taxes paid for by the mortgage lender, and interest paid at the house’s purchase.”

Planning For Next Year

While it’s too late to adjust your withholding amount for this year’s taxes, chances are, you’re OK where you’re at, says Kumar.

“There is really no reason to adjust the withholding unless money is needed or one is losing on interest,” he says. “Still, homeowners do have the chance to [adjust their withholding] if they can calculate adjustments appropriately, keeping in mind their deductions and credits as an overall taxpayer and homeowner.”

Zimmelman takes a more prudent approach:

“You should reevaluate your withholding amount any time you experience a big life change, including buying a new home. Becoming a homeowner usually reduces your tax liability, and you want to make sure your withholding is at the perfect amount for you and your income." 

Generally, it’s pretty easy to tell whether your withholding amount could use revisiting, he says. “If you find yourself owing a lot of money every tax season, then you’re probably withholding too little. If you get a big tax refund every year but struggle from paycheck to paycheck, then you’re probably withholding too much.”

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