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How does the Tax Cuts and Jobs Act impact homeowners?

The Tax Cuts and Jobs Act (TCJA) will impact the affordability of owning a home or vacation property and using its equity as a means of obtaining lower cost financing for personal expenditures. This will be readily apparent to homeowners when they file their income tax returns for calendar years starting in 2018 in two specific ways.

Impact #1: Deductions for mortgage and home equity loan interest

The TCJA limited the itemized deduction available for homeowners. The original tax code set the limit for this deduction at $1 million for a married couple filing a joint return. The TCJA reduced this limit to $750,000. Under the TCJA, starting in 2018, the limit on acquisition debt is reduced to $750,000 ($375,000 for a married taxpayer filing separately). The $1 million, pre-TCJA limit, however, applies to "acquisition debt" incurred before December 15, 2017, and to debt arising from refinancing such debt, if the refinancing does not exceed the original debt amount. Thus, taxpayers can refinance up to $1 million of pre-Dec. 15, 2017 acquisition debt, without being subject to the reduced limitation

The law also changed the ability of a homeowner to deduct interest from a home equity loan. In the past, a homeowner could refinance his or her home up to $100,000, and use the money to fund their own or their children's education or pay off other debt. The new law eliminated an itemized interest expense deduction of home equity loans used for those purposes.

Impact #2: State and local tax limitations

Under the old law, homeowners also received a benefit through the ability to deduct state and local property tax payments on the federal returns. The TCJA has put a limitation on the amount a homeowner can deduct. The new law only allows married, joint filing homeowners to deduct up to $10,000 in state and local taxes. This limitation applies to all such taxes - income and property.

The impact will depend on the taxpayer's state of residence. California imposes both an income tax and property tax. In a high personal income tax regime, such as California, the combined with property taxes which generally range from 1.1 percent to 1.6 percent of the home's assessed value, this can quickly add up to exceed the $10,000 deduction for a married couple ($5,000 for married persons filing separately) set by the TCJA.

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