Are you thinking about downsizing in retirement? Maybe you plan to make your vacation home your primary residence once there’s no office to commute to everyday. Or, maybe you’re considering buying a property to rent out to generate income in retirement. Either way, if you’re thinking about buying a house you should probably take some time to learn how it will impact your tax situation. It may have been a while since you bought a home, and the rules of homeownership have changed in the past few years thanks to tax reform.
If you itemize your taxes, then you have the opportunity to deduct your mortgage interest. This is a way to help make homeownership more affordable. Around 21% of taxpayers claim this deduction, saving them an average of $1,950 in 2016. But the following year, tax reform almost doubled the standard deduction to $12,000 for single filers and $24,000 for married couples filing jointly, thus reducing the number of people who chose to itemize. If you used to itemize but now take the standard deduction, keep in mind that you can no longer deduct your mortgage interest on your current home, or any new home you might buy.
As an experienced home owner, you likely know that property taxes are a cost to consider and plan for. Tax reform capped the state and local tax deduction at $10,000. This now means you can deduct up to $10,000 in total, not per property. Therefore, this could make owning multiple homes more costly, especially in states and cities with high taxes. Also, you can no longer deduct mortgage interest on second homes bought after the new law took effect, which is one thing to consider if you are thinking about buying a second home.
You may not be able to deduct all of your mortgage because the mortgage interest deduction is now capped at $750,000 instead of $1 million for new mortgages. Home equity loans are also no longer deductible, so be sure to review and plan carefully before committing to such an illiquid asset.
These homeownership rule changes could also impact your ability to sell your home, especially if it is worth over $750,000 or comes with high property taxes. This could ultimately change your decision to downsize in retirement, invest in a rental property, or buy a vacation home.
Buying a second home and moving in retirement are big decisions. If you need help navigating the new tax code when deciding how second homeownership will affect your overall retirement plan, contact the professionals at Madrona Financial. We can help you create a comprehensive retirement plan that helps to minimize your tax burden, so click here to schedule your no cost, no obligation financial review.