5 Ways the 2017 TCJA Still Affects Your Mortgage

Comerica Bank

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The Tax Cuts and Jobs Acts of 2017 (TCJA) was the first substantive rewriting of the tax code in nearly three decades.

The Tax Cuts and Jobs Acts of 2017 (TCJA) was the first substantive rewriting of the tax code in nearly three decades. The result was a package of legislation that notably reduced the corporate tax rate, consolidated the number of tax brackets and included a raft of other changes (like an expanded child care credit and a doubled standard deduction).

Its effects have been felt across the nation by the average American consumer, family and business. Homeowners, specifically, now operate in a new tax reality. As part of the larger tax reform effort, a variety of tax code specifics were revised that both directly and indirectly impacted homeowners and their mortgages, property taxes and other household finances.

With TCJA provisions in effect until 2025, it is highly important that homeowners understand what the law means for them. This is needed to ensure they can make full use of the available tax savings, as well as keep their finances in compliance. There's no hurt in getting professional advice on what to do and how to file, but to start, here are five ways the 2017 tax bill can affect your mortgage:

1. Reduced mortgage interest deduction

The most direct impact the TCJA had on mortgages (compared to the tax law previously in place) is the reduced cap on deductible mortgage interest. Before 2018, homeowners could claim interest on a maximum of $1 million in home debt. The TCJA-imposed limit is $750,000 and applies to mortgages taken out between 2018 and 2025 (elements of the rewritten tax code will be up for renewal by Congress at that point).

Some homeowners may have had an existing mortgage grandfathered in with the full $1 million deduction possible. The total for married filing separate was also adjusted down to $375,000 from $500,000.

The change is important to note for a number of reasons, as the mortgage interest deduction was a favorite of homeowners and the real estate community. In essence, the code allows for consumers to deduct interest from any home debt they take on to either purchase a residence or perform qualified improvements to one. The reduction in the allowable amount effective 2018 caused some concern, but not all households are heavily impacted tax-wise.

For example, the mortgage interest deduction only matters if you itemize your taxes. To itemize, it has to be worth it for the homeowner. That is, total claims have to be above the standard deduction. That isn't the case for a lot of homes — especially after the TCJA doubled the standard deduction, which discouraged itemization for many. However, of Americans who itemize, nearly all are homeowners, so the change still carries weight. Homeowners, and prospective buyers, in urban or affluent areas with high home prices don't have the same latitude in deducting mortgage interest.

2. Reduced property tax deduction

Reform aimed at the state and local tax deduction was another plank of the TCJA. Commonly referred to as SALT, the state and local tax deduction allows homeowners to claim what they pay in property, income and sales tax to their state or local government. While previous codes did not specify a maximum amount that can be deducted, the TCJA introduced a $10,000 limit for combined SALT deductions - which impacted deductions for property taxes. The cap for married filing separate is $5,000, and SALT deductions are only applicable when a household itemizes.

What was a significant allowance for homeowners became much narrower. In 2018, homeowners across places like California, Texas, Florida and the East Coast had to come to terms with a limit on SALT deductions when before there was none. The change was not only felt in the most populous or wealthy states, either. Home prices have continued to rise since the TCJA went into effect. Additionally, property taxes are tied to mortgages because many private lenders set up escrow accounts that put monthly mortgage payments toward paying down property taxes, a form of automated payment. The TCJA still allows for deductions to be made from this arrangement. However, the amount deducted is only what the lender pays out, not what you pay into escrow.

3. Preserved deduction for a second mortgage

While the TCJA decreased the interest deduction, it was not all bad news on the mortgage front. The second mortgage interest deduction was preserved in the TCJA, despite reportedly being on the chopping block. This provision is essentially the same as the primary mortgage deduction — homeowners can claim interest on debt incurred to purchase or renovate a residence — except it applies to a second or vacation home. What's not included, however, are investment properties that are primarily rented out and which are bought or upgraded.

Under the old tax code, homeowners were allowed to deduct interest on up to $1 million in second mortgage debt for qualified secondary or vacation residences, either to buy or improve. Instead of being cut altogether, a cap of $750,000 was installed, aligning it with the primary mortgage interest deduction rule. While the new rule lowered the deduction, it's still a win for homeowners looking to buy a second home. Retaining the ability to deduct interest on up to $750,000 in mortgage debt for a second home is no small deal. Working with your bank to best leverage the current tax code as it relates to homeownership is essential to personal financial well-being.

4. Restricted qualifying HELOC deductions

Although a home equity line of credit (HELOC) is a separate product from a mortgage, the two are still closely connected. A HELOC can either be a loan or personal line of credit a lender extends to a homeowner based on equity built in the home. It can unlock cash liquidity and help owners pay for things like home improvements or credit card debt. Some even use it as a primary mortgage if they outright own their home — so it is crucial that homeowners understand how the TCJA changed deductions for HELOC interest.

Many homeowners have used a HELOC to pay for college or a wedding, even insurance premiums or student loan debt. Previous tax law allowed for interest to be deducted on up to $100,000 from HELOC debt; and while the TCJA maintained the same $100,000 ceiling, crucially it added a mandate that for interest to be considered permissible, the money must be used to "buy, build or substantially improve the taxpayer's home that secures the loan," the Internal Revenue Service said. The limit is $50,000 for married taxpayers who file separately, but the same qualifying criteria apply. So, while some homeowners may be familiar with leveraging proceeds from a HELOC to pay down personal debts, they cannot deduct interest paid on such funds as long as the TCJA is active.

5. Grandfathered mortgages can refinance at prior level

If a taxpayer has a mortgage that was taken out before Dec. 15, 2017 — the cut-off date for grandfathered-in mortgages — and opts to refinance under the new tax bill, the homeowner can still take advantage of the prior allowance for $1 million in deductible interest on home debt. Even though the "new," refinanced mortgage may technically be originated while the TCJA is in effect, the law treats it as being tied to the original date of the mortgage's first issuance. 

This may create an incentive for homeowners who have an existing mortgage and had been considering refinancing to take advantage of a variable rate. Refinancing and still being covered under the old maximum deduction could further encourage homeowners to take action while they can still write off as much as they possibly can.

In all, while reforms due to the TCJA have been broad, the changes to how Americans treat their mortgages and homeowner finances are notable. Understanding your tax situation and how your mortgage may take an adjustment, which makes speaking with qualified professionals valuable. Get in touch with Comerica Bank today to get more information on how you can strategize personal finance and address changes to taxes and your mortgage. 

This information is provided for general awareness purposes only and is not intended to be relied upon as legal or compliance advice.

This article is provided for informational purposes only. While the information contained within has been compiled from source[s] which are believed to be reliable and accurate, Comerica Bank does not guarantee its accuracy. Consequently, it should not be considered a comprehensive statement on any matter nor be relied upon as such.

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