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What You Need to Know About Home Owner Tax Changes

by Melissa Thompson

Tax Day is looming and while it’s a dreaded task for some, doing taxes is something we all must do.  One of the perks of being a homeowner is that it provides the benefit of some tax deductions.  All homeowners should be aware of these tax perks to take advantage of them and maximize their financial savings.  Recently, a government overhaul of U.S. tax laws included changes that affect homeowners.  While these changes will not be in place for the 2017 tax year, it is wise to be prepared for how they will affect your 2018 taxes.

  1. Home Mortgage Interest Deduction

The mortgage interest tax deduction is considered a way to make homeownership more affordable.Qualifying homeowners can reduce their taxable income by the amount of mortgage interest they pay.Currently, you may deduct the interest you pay on mortgage debt up to $1 million ($500,000 if married and filing separately) on your primary home and a second home.Beginning in 2018, for homes purchased December 15, 2017 and after, the numbers change to $750,000 ($375,000 if married and filing separately).There is an exception in the new tax law that allows for a refinanced mortgage loan to be given the old loan’s origination date. This means if the old loan originated prior to December 15, 2017, the old limit of $1 million would apply.

  1. Property Tax Deduction

The tax law through 2017 allowed homeowners to reduce their taxable income by the total amount of property taxes they paid.  Starting next year, the deduction will be limited to a total of $10,000 for the combination of the cost of property taxes, state and local income taxes or sales taxes.

  1. Home Equity Deduction

Up through your 2017 tax return, the tax law allowed for an added deduction for interest paid on home equity debt “for reasons other than to buy, build, or substantially improve your home.”  In other words, if you took out a home equity line of credit to do something like pay tuition, the interest you paid on that line of credit was tax-deductible.  Starting next year, this deduction will be eliminated.

  1. Tax Breaks for Owning a Second Home

As stated above, you may deduct interest on mortgage debt on both your primary home and a second home.  The new law changes this a bit for 2018.  It reduces the amount of eligible mortgage debt from $1 million to $750,000.

  1. Moving Expenses

While it was a complicated process that involved criteria such as distance and timing of a move, up through this year the tax law allowed you to deduct some moving expenses if you moved for a new job.  Starting in 2018, only active-duty members of the armed forces will be allowed to deduct moving expenses.

If you find the tax laws confusing, you are not alone. It is smart to ask a reputable accountant any questions you may have so that you can maximize the tax perks of being a homeowner!

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Housing and the Senate Tax Plan: What Now?

by Melissa Thompson

Members of the real estate industry are responding to the passage of the Senate tax plan, which chiefly includes a 20 percent corporate tax rate—down from 35 percent—and reduced rates for families and individuals over the next seven years. The development follows the House passage of its own plan in November.

Both bills challenge homeownership, industry members say. The bills extend the capital gains exclusion eligibility requirement that home sellers reside in the home from two of the last five years to five of the last eight. (The House plan, however, includes an income phaseout provision.) Both also raise the standard deduction, which has the potential to render the mortgage interest deduction (MID) useless.

“If eligibility rules for excluding the sale of a home from capital gains taxes are changed from requiring living in your home for two of the past five years to five of the past eight, selling the median U.S. home after four years of ownership would mean $2,363 in taxes, from $0 currently,” according to Skylar Olsen, senior economist at Zillow. An analysis recently released by Zillow reveals homeowners in high-priced markets would bear the brunt of costs from the lengthened tenure.

The MID itself is addressed in both plans, as well. The House plan caps the MID for new loans at $500,000 (and only for primary residences), whereas the Senate plan retains the current cap of $1 million.

Additionally, both bills cap local and state property tax deductions at $10,000.

According to the National Association of REALTORS® (NAR), the industry’s largest organization, homeownership incentives are jeopardized in the Senate plan.

“The tax incentives to own a home are baked into the overall value of homes in every state and territory across the country,” said NAR President Elizabeth Mendenhall in a statement. “When those incentives are nullified in the way this bill provides, our estimates show that home values stand to fall by an average of more than 10 percent, and even greater in high-cost areas. REALTORS® support tax cuts when done in a fiscally responsible way; while there are some winners in this legislation, millions of middle-class homeowners would see very limited benefits, and many will even see a tax increase. In exchange for that, they’ll also see much or all of their home equity evaporate as $1.5 trillion is added to the national debt and piled onto the backs of their children and grandchildren. That’s a poor foot to put forward, but this isn’t the end of the road. REALTORS® will continue to advocate for homeownership and hope members of the House and Senate will listen to the concerns of America’s 75 million homeowners as the tax reform discussion continues.”

“It’s time for homeowners to pay attention,” concurred Danielle Hale, chief economist of realtor.com®, in a statement. “While the House and Senate still need to agree to a single version of the tax plan, they are already aligned on provisions that take away homeownership incentives for the majority of owners, which we expect to reduce home sales and prices in markets across the country.”

Housing in general—but notably in several states—will suffer, Hale said.

“Homeowners in California, New York, New Jersey, and Maryland will be hit hard by the combination of changes in the proposal, which will lead to lower prices and sales in these housing markets,” said Hale. “High housing costs in California made it the state with the third-highest average mortgage interest deduction, behind Hawaii and the District of Columbia. Meanwhile, the elimination of the state income tax deduction for individuals will affect taxpayers in Maryland, the District of Columbia, Connecticut, New Jersey, Massachusetts, and Virginia, each of which saw 35 percent or more of tax payers take advantage of this provision. Lower-priced housing markets will also eventually be impacted, as these provisions are not indexed by inflation; thus, the few remaining tax benefits for homeownership will be eroded over time.”

The California Association of REALTORS® (C.A.R.) expressed its own concerns about the Senate plan in a statement.

“We are disappointed that the Senate voted to pass a tax hike bill on California homeowners,” said C.A.R. President Steve White. “If the goal of this bill is to help middle-class Americans keep more of their hard-earned money, this proposal fails miserably. We thank California Senators Dianne Feinstein [D-Calif.] and Kamala Harris [D-Calif.] for opposing this legislation that attacks homeownership by significantly reducing incentives for people to buy homes. California already has a severe housing affordability crisis, and this bill will make it that much harder for Californians looking to attain the American Dream.”

The National Association of Home Builders (NAHB) countered that the Senate plan “represents a step in the right direction” in an NAHB Now update. The NAHB opposes the House plan in part because it applies the MID only to primary residences, and imposes an income phaseout on the capital gains exclusion.

The Mortgage Bankers Association (MBA), meanwhile, applauded the Senate for considering mortgage servicing rights (MSRs) in its deliberations.

“I want to personally thank Majority Leader [Mitch] McConnell, [Senate Finance Committee] Chairman [Orrin] Hatch [R-Utah], Senator [Mike] Rounds [R-S.D.], [Senate Banking Committee] Chairman [Mike] Crapo [R-Idaho], and Senator [David] Perdue [R-Ga.] for working with us and commend them for their efforts on this important issue,” said MBA CEO and President David H. Stevens in a statement. “Because of the Rounds Amendment, this package will protect the ability of most Americans to obtain safe, decent shelter and affordable home mortgage credit without disruption. Had this language not been included, the change in tax accounting for MSRs would have had a devastating impact on the flow of capital that supports a robust and competitive real estate finance market, both single- and commercial/multifamily. We thank the Senate for its leadership on this issue.”

According to the National Low Income Housing Coalition (NLIHC), the affordability crisis will escalate under the Senate plan. Diane Yentel, CEO and president of the NLIHC, issued the following statement:

“The Senate tax plan not only fails to make any new investments to address the nation’s growing scarcity of affordable rental homes for America’s poorest families, but it would lead to deep funding cuts to existing affordable housing programs, threatening to worsen the severity of an affordable housing crisis that impacts every state and community.”

The differences between the House and Senate plans remain to be settled. Lawmakers are aiming to present a reconciled plan to President Trump by Christmas.

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Tax Return Depressing? Owning a Home Could Help

by Melissa Thompson

Tax Return Depressing? Owning a Home Could Help | Keeping Current Matters

Many Americans got some depressing news last week; either their tax return was not as large as they had hoped or, in some cases, they were told they owed additional money to either the Federal or State government or both. One way to save on taxes is to own your own home.

According to the Tax Policy Center’s Briefing Book -“A citizen's guide to the fascinating (though often complex) elements of the federal Tax System” - there are several tax advantages to homeownership.

Here are four items, and a quote on each, from the Briefing Book:

1. Mortgage Interest Deduction

“Homeowners who itemize deductions may reduce their taxable income by deducting any interest paid on a home mortgage. The deduction is limited to interest paid on up to $1 million of debt incurred to purchase or substantially rehabilitate a home. Homeowners also may deduct interest paid on up to $100,000 of home equity debt, regardless of how they use the borrowed funds. Taxpayers who do not own their home have no comparable ability to deduct interest paid on debt incurred to purchase goods and services.”

2. Property Tax Deduction

“Homeowners who itemize deductions may also reduce their taxable income by deducting property taxes they pay on their homes.”

3. Imputed Rent

“Buying a home is an investment, part of the returns from which is the opportunity to live in the home rent-free. Unlike returns from other investments, the return on homeownership—what economists call “imputed rent”—is excluded from taxable income. In contrast, landlords must count as income the rent they receive, and renters may not deduct the rent they pay. A homeowner is effectively both landlord and renter, but the tax code treats homeowners the same as renters while ignoring their simultaneous role as their own landlords.”

4. Profits from Home Sales

“Taxpayers who sell assets must generally pay capital gains tax on any profits made on the sale. But homeowners may exclude from taxable income up to $250,000 ($500,000 for joint filers) of capital gains on the sale of their home if they satisfy certain criteria: they must have maintained the home as their principal residence in two out of the preceding five years, and they generally may not have claimed the capital gains exclusion for the sale of another home during the previous two years.”

Bottom Line

We are not suggesting that you purchase a house just to save on your taxes. However, if you have been on the fence as to whether 2017 is the year you should become a homeowner, this information might help with that decision. Contact The Melissa Thompson Team today to start your home search! 901-729-9526 or [email protected] 

Disclaimer: Always check with your accountant to find out what tax advantages apply to you in your area.  

Tax Day is approaching quickly and now is the time to take advantage of every deduction possible. As a homeowner, there may be more deductions than you thought!  Here are some homeowner tax breaks you might not have known about:

  • Mortgage interest deduction - If you’ve taken out a loan to buy a house, you can deduct the interest you pay on a mortgage, with a balance of up to $1 million. To access this deduction, you must itemize rather than take the standard deduction. The savings here can add up in a big way. For example, if you’re in the 25% tax bracket and deduct $10,000 of mortgage interest, you can save $2,500.
  • Private mortgage insurance - Qualified homeowners can deduct payments for private mortgage insurance, or PMI, for a primary home. Sometimes you can take the deduction for a second property as well, if it isn’t a rental unit. However, this only applies if you got your loan in 2007 or later. Also, this deduction only applies if your adjusted gross income is no more than $109,000 if married filing jointly or $54,500 if married filing separately.
  • Property taxes - You can include state and local property taxes as itemized deductions. An interesting note: The amount of the deduction depends on when you pay the tax, not when the tax is due. So, paying property taxes earlier could have a positive impact on your return.
  • Capital gains on a home sale - The dreaded capital gains tax can be avoided when the gain from selling your personal residence is less than $250,000 if you are a single taxpayer or $500,000 if you are a joint filer. To qualify, you must have owned and used the home as a primary residence for at least two years out of the five years leading up to the sale.
  • Medical improvements - If you’ve made improvements to your home to help meet medical needs, such as installing a ramp or a lift, you could deduct the expenses—but only the amount by which the cost of the improvements exceed the increase in your home’s value. (In other words, you can’t deduct the entire cost of the equipment or improvements.) These types of deductions can be tricky, but are worth looking in to. Guidelines for Medical Improvement Tax Deductions
  • Home office - If you have a dedicated space in your home for work and it’s not used for anything else, you could deduct it as a home office expense.
  • Renting your home out on occasion - If you rented out your home for, say, a major sports event like the Super Bowl or the World Series, or a cultural event such as Mardi Gras, the income on the rental could be totally tax free—as long as it was for only 14 days or fewer throughout the course of a year.
  • Discount Points - Discount points which are paid to lower the interest rate on a loan, can be deducted in full for the year in which they were paid. If you’re buying a home and the seller pays the points as an incentive to get you to buy the house, you can deduct those points as well.
  • Energy-efficiency tax credit - You can take advantage of an energy efficiency tax credit of 10% of the amount paid (up to $500) for any “green” improvements, such as storm doors, energy efficient windows and AC and heating systems.

For more tax tips, check out IRS Publication 530 for a list of what homeowners can (and cannot) deduct.

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Don't Miss These Home Tax Deductions

by Melissa Hayes Thompson

From mortgage interest to property tax deductions, here are the tax tips you need to get a jump on your returns. 

Owning a home can pay off at tax time. Take advantage of these homeownership-related tax deductions and strategies to lower your tax bill:

Mortgage Interest Deduction 

One of the neatest deductions itemizing homeowners can take advantage of is the mortgage interest deduction, which you claim on Schedule A. To get the mortgage interest deduction, your mortgage must be secured by your home — and your home can be a house, trailer, or boat, as long as you can sleep in it, cook in it, and it has a toilet.

Interest you pay on a mortgage of up to $1 million — or $500,000 if you’re married filing separately — is deductible when you use the loan to buy, build, or improve your home.

If you take on another mortgage (including a second mortgage, home equity loan, or home equity line of credit) to improve your home or to buy or build a second home, that counts towards the $1 million limit.

If you use loans secured by your home for other things — like sending your kid to college — you can still deduct the interest on loans up $100,000 ($50,000 for married filing separately) because your home secures the loan.

PMI and FHA Mortgage Insurance Premiums

You can deduct the cost of private mortgage insurance (PMI) as mortgage interest on Schedule A if you itemize your return. The change only applies to loans taken out in 2007 or later.

By the way, the 2014 tax season is the last for which you can claim this deduction unless Congress renews it for 2015, which may happen, but is uncertain.

What’s PMI? If you have a mortgage but didn’t put down a fairly good-sized downpayment (usually 20%), the lender requires the mortgage be insured. The premium on that insurance can be deducted, so long as your income is less than $100,000 (or $50,000 for married filing separately).

If your adjusted gross income is more than $100,000, your deduction is reduced by 10% for each $1,000 ($500 in the case of a married individual filing a separate return) that your adjusted gross income exceeds $100,000 ($50,000 in the case of a married individual filing a separate return). So, if you make $110,000 or more, you can’t claim the deduction (10% x 10 = 100%).

Besides private mortgage insurance, there’s government insurance from FHA, VA, and the Rural Housing Service. Some of those premiums are paid at closing, and deducting them is complicated. A tax adviser or tax software program can help you calculate this deduction. Also, the rules vary between the agencies.

Prepaid Interest Deduction

Prepaid interest (or points) you paid when you took out your mortgage is generally 100% deductible in the year you paid it along with other mortgage interest. 

If you refinance your mortgage and use that money for home improvements, any points you pay are also deductible in the same year. 

But if you refinance to get a better rate or shorten the length of your mortgage, or to use the money for something other than home improvements, such as college tuition, you’ll need to deduct the points over the life of your mortgage. Say you refi into a 10-year mortgage and pay $3,000 in points. You can deduct $300 per year for 10 years.

So what happens if you refi again down the road?

Example: Three years after your first refi, you refinance again. Using the $3,000 in points scenario above, you’ll have deducted $900 ($300 x 3 years) so far. That leaves $2,400, which you can deduct in full the year you complete your second refi. If you paid points for the new loan, the process starts again; you can deduct the points over the life of the loan.  

Home mortgage interest and points are reported on Schedule A of IRS Form 1040.

Your lender will send you a Form 1098 that lists the points you paid. If not, you should be able to find the amount listed on the HUD-1 settlement sheet you got when you closed the purchase of your home or your refinance closing. 

Property Tax Deduction 

You can deduct on Schedule A the real estate property taxes you pay. If you have a mortgage with an escrow account, the amount of real estate property taxes you paid shows up on your annual escrow statement.

If you bought a house this year, check your HUD-1 settlement statement to see if you paid any property taxes when you closed the purchase of your house. Those taxes are deductible on Schedule A, too.

Energy-Efficiency Upgrades

If you made your home more energy efficient in 2014, you might qualify for the residential energy tax credit.

Tax credits are especially valuable because they let you offset what you owe the IRS dollar for dollar for up to 10% of the amount you spent on certain home energy-efficiency upgrades.  

The credit carries a lifetime cap of $500 (less for some products), so if you’ve used it in years past, you’ll have to subtract prior tax credits from that $500 limit. Lucky for you, there’s no cap on how much you’ll save on utility bills thanks to your energy-efficiency upgrades.

Among the upgrades that might qualify for the credit:

To claim the credit, file IRS Form 5695 with your return. 

Vacation Home Tax Deductions

The rules on tax deductions for vacation homes are complicated. Do yourself a favor and keep good records about how and when you use your vacation home.

  • If you’re the only one using your vacation home (you don’t rent it out for more than 14 days a year), you deduct mortgage interest and real estate taxes on Schedule A.
  • Rent your vacation home out for more than 14 days and use it yourself fewer than 15 days (or 10% of total rental days, whichever is greater), and it’s treated like a rental property. Your expenses are deducted on Schedule E.
  • Rent your home for part of the year and use it yourself for more than the greater of 14 days or 10% of the days you rent it and you have to keep track of income, expenses, and allocate them based on how often you used and how often you rented the house.

Homebuyer Tax Credit

This isn’t a deduction, but it’s important to keep track of if you claimed it in 2008. 

There were federal first-time homebuyer tax credits in 2008, 2009, and 2010.

If you claimed the homebuyer tax credit for a purchase made after April 8, 2008, and before Jan. 1, 2009, you must repay 1/15th of the credit over 15 years, with no interest. 

The IRS has a tool you can use to help figure out what you owe each year until it’s paid off. Or if the home stops being your main home, you may need to add the remaining unpaid credit amount to your income tax on your next tax return.

Generally, you don’t have to pay back the credit if you bought your home in 2009, 2010, or early 2011. The exception: You have to repay the full credit amount if you sold your house or stopped using it as primary residence within 36 months of the purchase date. Then you must repay it with your tax return for the year the home stopped being your principal residence.

The repayment rules are less rigorous for uniformed service members, Foreign Service workers, and intelligence community workers who got sent on extended duty at least 50 miles from their principal residence.

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By: Dona DeZube and HouseLogic

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