Benjamin Franklin was the author of many memorable sayings, and one of the most memorable is, “There are only two certainties in life – death and taxes.” In spite of the very volatile times we’re living through, I’m adding one more: “Homeownership is still the best financial investment for the average person.” It also offers the best tax breaks, not to mention the best way to build equity.
There is a fire raging in the real estate market all over the country. With mortgage interest rates under 3%, those who have secure jobs are racing to either buy a home, if they can find one, or refinance their existing home.
This is happening even though the 2017 tax overhaul made the mortgage interest deduction irrelevant for many homeowners. These individuals have calculated that the standard tax deduction is more advantageous than taking their mortgage interest deduction, even adding in their previous state and local tax deduction.
Nevertheless, there are still plenty of deductions available for homeowners. Even though many homeowners are opting for the standard deduction, which is now $24,880 for a married couple filing jointly, getting to that number with 3% mortgage interest is difficult unless you’re purchasing in a higher price range and have other deductible expenses.
The problem with higher price point mortgages is the cap placed on them. For new mortgages issued after Dec. 15, 2017, homeowners can deduct up to $750,000 on mortgage interest debt. For mortgages issued before then, the cap is $1 million of mortgage debt, which is grandfathered. This rule also has stipulations regarding second homes and unmarried homeowners, so check with an accountant before making decisions.
Refinancing now is also very attractive, but if you refinance and cash out a portion of the new mortgage, you may not be able to deduct all of the interest, unless you can prove the extra cash was used as a home improvement. Home equity loans also fit into this category and interest deductions can only be used for substantial improvements to your home. Again, this could be a moot point if you are opting to use the standard deduction.
With a lot of people moving from cities, boat and RV loans are also getting popular. So, can the interest on these be deductible? Well, like everything IRS-related, it depends. In order for these to qualify for a deduction there must be cooking, sleeping and toilet facilities, then of course the interest deduction is still subject to the two homes requirement.
Home office and home remodels because of working from home are also something that seems relevant now. Home offices are not deductible if you are employed by someone else. However, if you are self-employed, you can make a deduction for a space in your home that is used on a regular basis and used exclusively for your business. Don’t ask how this is verified should you be audited. Interest for remodeling for a business you run from your home can be deducted, but like any business, it can affect the cost basis of the house when it is sold.
Finally, there are some new regulations regarding IRA and 401(k) withdrawals. Congress has loosened the rules for people affected by the pandemic, allowing a withdrawal up to $100,000 without paying the 10% penalty right now. This cost can be spread over three years or pay it back in full at a time when your finances are in a better place. Although this does not directly affect your home, it could improve your overall financial position until after the crisis.
Homeownership can still ease your tax liability and will probably be the best investment you ever make – even now. Stay safe.
