WHY WASHINGTON WANTS YOU TO RENT A HOME
Sing with me: Fa La La La La, La La La....TAXES. Happy 2018!
Like many of you, I spent the last two weeks of 2017 scrambling to understand the new lax code. Not that I am complaining (okay, maybe I am), but hopefully next time we decide to complete a total overhaul of the tax code, maybe we could do it with a little more time on the tail end for the nation to react before the end of the year! I felt so bad for the employees at tax firms, accounting and investing companies that were handling such a rapid increase in call volume and servicing right during the holidays. However, all those wait times allowed me some extra research into the new tax laws for 2018.
After a lot of reading, it has become pretty apparent that the new tax codes are favoring the rental market. This is not a great surprise to me as the new code is likely designed with business in mind. Though I am still a homeowner and plan to be in the future, I wanted to highlight a few areas in which the code is more attractive to renting homes. Whether that means you are thinking of renting or buying a home, or if you are planning to pick up a property to rent, this post is just another consideration in your journey in either aspect.
One more disclaimer. I am not an investment adviser, attorney, or accountant (though after reading through the tax code, I think any of these credentials would have been helpful!). Therefore, this is just what I am sharing from my reading. Little old me and my ideas. Read this with a grain of salt. Ok. There THAT is.
Mortgage Interest Deductions Have Decreased
You cannot deduct as much interest on primary and secondary home mortgages as you did in the past. Current loans that are in place prior to the new tax code are grandfathered in (meaning you can treat them as you did under the past tax code). Moving forward, any new loans will be subject to new level of interest deduction. This might affect you if you are looking for a larger or more expensive primary residence or considering a second mortgage for upgrading your home (or financing another thing like college using your a home equity loan). You can now deduct the interest from a combined value of all home mortgages of $750,000, which is reduced from the prior code.
$10,000 Cap on Local and State Tax Deduction
If you have a home and work in the same state, your deduction for your property taxes (local) and state taxes (from your income), are now capped at $10,000. This means if you pay $10,000 in property taxes every year, you can deduct them but no longer receive credit for the taxes you paid to your state in income. If you paid $10,000 in state income taxes, you can no longer receive credit you paid for property taxes to your local government. If you paid $15,000 in property taxes, you don't get to deduct that last $5k. Same goes for your income tax. Therefore, depending on your local and state tax rates, some of your previous deductions gained by owning a home, might be diminished.
Mortgage Interest and Property Taxes on Rental Properties are a Business Expense, not a Deduction
Looking at the first law, you might be nervous if you own several homes as rental properties. I know I was. Upon further review, I remembered that the mortgage interest and property taxes of rental homes are taken as business expenses on the rentals, not as deduction on the taxes. What this means is that the full amounts of interest and property taxes paid are a direct expense to the business and are not taken as a proportionate deduction on taxes. Therefore, these new tax laws for home ownership are not the same for a business renting homes. Whew.
Where does this leave us? Owning a rental property is not a bad plan with the new tax code, even though it might seem scary at first. If you are considering a jumbo mortgage, or a second mortgage, and are using property taxes and interest deductions as part of your rationale and computation, you need to consider the fact that those rules have changed. That does not mean buying a home is a bad idea (not at all in my opinion), but when playing the game of home purchases, you better be sure you understand the rules.
Are you going to buy a new home this year? Does the new tax code change your thoughts on any of it? Have you thought about buying a rental property this year? I'd love to hear your thoughts!