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Home is Where the Heart Is ... but Not Necessarily the Tax Deduction

“Home is the nicest word there is.” Long after Laura Ingalls Wilder penned these words, home ownership continues to be part of the American Dream. Since we get lots of questions on this topic, let’s look at some tax considerations related to buying a new house:

There are many great reasons to own a home, but changes brought about by the Tax Cuts and Jobs Act (TCJA) mean fewer taxpayers actually get a tax benefit from doing so. The good news is mortgage interest continues to be a potentially deductible expense. However, if your home is truly a castle, be aware that the TCJA only allows a deduction for interest on mortgages up to $750,000. Points paid on a first mortgage are potentially deductible; those paid on a refinance must be amortized over the life of the loan.

The deduction for mortgage insurance premiums, which had to be renewed with annual “extender bills,” was allowed to expire last year, making this deduction unavailable on 2018 tax returns. It remains to be seen if Congress will revive this deduction for 2019 or not. However, real estate taxes paid on primary and vacation homes continue to potentially be deductible.

Why do we say “potentially”? To deduct these expenses, taxpayers must itemize on Schedule A instead of taking the standard deduction. With the TCJA doubling the standard deduction ($12,200 for singles and $24,400 for married couples filing jointly in 2019), most taxpayers no longer benefit from itemizing. No Schedule A means no specific tax benefit from mortgage interest, real estate taxes, points, etc.

Taxpayers who might meet the itemizing threshold face another obstacle: the TCJA limits the deduction for all state and local taxes to $10,000 regardless of filing status. Any state taxes withheld from W-2 wages are included in this limit. With this cap on state and local taxes, only taxpayers with considerable medical and/or charitable deductions will itemize.

New homeowners considering itemizing should check their closing statement. These documents sometimes include interest and real estate taxes paid at closing that do not show up on year-end mortgage interest statements. Although usually small amounts, taxpayers who do end up itemizing don’t want to cheat themselves.

Finally, we get questions about taking money out of qualified retirement accounts in order to make the down payment on a house. Generally speaking, taking funds out of such accounts prior to reaching normal withdrawal age (usually 59 ½) is not a good idea since the taxpayer will owe taxes on the amount taken out in addition to a 10% early withdrawal penalty. There is an exception to the penalty only (taxes on the amount withdrawn still apply) for first-time home buyers who withdraw $10,000 or less from a traditional IRA. 401(k) and similar accounts do not get this special break. Rules governing retirement accounts are complex, so speak with a tax professional before making an early withdrawal.

There truly is no place like home, and changes to the tax code shouldn’t deter anyone from the dream of owning their own home. However, don’t rely on the old rules or you may be disappointed at tax time. If you have questions about any of the tax aspects of buying a home, give us a call. And if you’re on the opposite side of the transaction and you’re selling your house, stay tuned for part 2 of this series when we focus on the tax consequences of selling.

hands holding keys to new house


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