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    Most of us are aware that tax reform was passed through Congress late last year. But how exactly do those changes trickle down to our real lives—and pocketbooks—in 2018?

    Well, if you’re a homeowner—or you’re thinking of becoming one this year—it could impact your annual tax returns, specifically how you file them, what deductions you can take and, ultimately, how much you’ll owe in taxes across the year.

    Let’s break down exactly how the new reform can impact you as a homeowner.

    Mortgage Interest Tax Deductions

    The biggest change that will impact homeowners is the mortgage interest tax deduction. Previously, homeowners could deduct interest on up to $1 million of mortgage debt from their income. Now, that limit is $750,000.

    There are some caveats to be aware of, though:

    • The change in the mortgage interest tax deduction cap only applies to new buyers (those who buy a home after Dec. 15, 2017.) Existing homeowners can still deduct interest on up to $1 million.
    • The deduction cap also depends on how you file your returns. If you’re married and file jointly, you can deduct interest on $750,000 or $1 million, based on when you bought your home. If you file your returns separately, you can only deduct half of that—$375,000 or $500,000, respectively.

    The tax changes also impact homeowners with home equity lines of credit. Through 2025, interest on these loans will no longer be tax-deductible unless the loan is being used to “buy, build or substantially improve the taxpayer’s home.” Buying a second home or vacation home doesn’t qualify, under the new law.

    Interest on refinances is still deductible, as these loans are treated as if they were originated on the old loan’s date. Homeowners who refinance on a pre-Dec. 15, 2017 home mortgage can still deduct interest on up to $1 million in mortgage debt.

    Property Tax Deductions

    The latest tax reform also changes how property taxes can be deducted from your tax liability. Previously, homeowners could deduct the full amount of their property taxes, regardless of its total cost, from their annual taxable income. With the new tax law in place, homeowners can deduct property taxes only up to $10,000. This drops to $5,000 if the homeowners are married and file their tax returns separately.

    Other Deductions

    Under the new tax law, the average American will no longer be able to deduct moving expenses from their tax returns. In years past, if you met certain criteria regarding distance moved and total costs of your move, you could deduct those expenses from your income. Now, only active duty service and military members can deduct moving expenses.

    What Didn’t Change

    One of the major items that was left untouched during recent tax reform was the capital gains exclusion. Traditionally, homeowners could write off up to $500,000 of capital gains—essentially profits made on the sale of their home—and avoid paying income taxes on it. Though Congress considered changing this limit, the old rule held fast and still remains as we go into 2018.

    To take advantage of the capital gains exclusion, you must have used the home as your primary residence for at least two years. If you’re married and filing your returns jointly, you can only deduct $250,000.

    The Financial Benefits of Homeownership

    As you can see, recent tax reform does mean some change is afoot if you’re a homeowner —or if you plan to become one in the near future. But overall, the changes are minor. The financial benefits of buying and selling real estate are still significant, and with the right professionals on your side, you can maximize your ROI and make a smart, financial investment in your future.

    Contact Embrace Home Loans today to learn more or get started on your loan application.

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