Mortgage lender: You should be able to close a loan ‘in less than 30 days’
United Wholesale Mortgage CEO Mat Ishbia provides insights into interest rates, which are nearing record lows.
The coronavirus pandemic has had profound effects on real estate, and the sudden shifts make it a good time to delve into tax breaks available to home buyers and homeowners.
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Many people are scrambling to get mortgages now that interest rates are under 3%, either to buy a home in a red-hot market or refinance debt on an existing one. Others, who are working from home far longer than expected, are itching to renovate their nest or add workspace.
And then there are those who have moved to vacation homes for the long haul. Some are even social-distancing in motor homes or boats.
The tax landscape for homeowners changed with the 2017 tax overhaul, which made the long-cherished mortgage-interest deduction irrelevant for many. For 2018, 13 million filers claimed this write-off, down about 60% from 2017's total of 33 million filers. The overhaul also limited interest deductions on home-equity loans and repealed a benefit for some home offices.
But other tax breaks for homes remain, such as one allowing mortgage-interest write-offs for motor homes and boats. Loosened rules on withdrawals from retirement accounts could provide a source of funds for home buyers who need cash this year. A spokeswoman for TD Bank said it's allowing such withdrawals to be used for down payments.
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Whether you're part of a backlog of buyers or mulling changes to your current home, here are answers to key questions — plus examples to show how the rules apply in different situations.
Will I get a mortgage-interest deduction if I buy a home?
Yes, but it might not lower your taxes, if your "standard deduction" is higher than your total itemized deductions listed on Schedule A.
The 2017 overhaul nearly doubled the standard deduction, and now it's $24,800 for most married couples filing jointly and $12,400 for most single filers. So millions fewer homeowners are itemizing.
Typical itemized deductions are for mortgage interest, charitable donations, medical expenses and state and local taxes (SALT), such as property and income or sales taxes. SALT deductions are limited to $10,000 per tax return.
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Here are examples provided by Evan Liddiard, a CPA who directs federal tax policy at the National Association of Realtors. Say that a married couple buys a $400,000 home with a 20% down payment, a 3% interest rate and a 30-year fixed rate mortgage. The first-year interest deduction would be about $9,500.
If the couple deducts that amount, along with the limit of $10,000 for SALT, they'd still need more than $5,300 in charitable or other write-offs to get above the $24,800 threshold.
Many single filers will find it easier to get a benefit. If a single person buys a $250,000 home with 20% down and a 3% interest rate, the first-year interest is about $5,950. If this buyer lives in a higher-tax area and has $10,000 of SALT write-offs, then his total itemized deductions are more than $3,500 above the $12,400 threshold, even without other write-offs.
How much mortgage interest can I deduct?
For new mortgages issued after Dec. 15, 2017, taxpayers can deduct interest on up to $750,000 of mortgage debt on up to two homes.
For mortgages issued before that date, a "grandfather" provision allows interest deductions on up to $1 million of mortgage debt on up to two homes.
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Here's how these two rules can interact. If a homeowner has a grandfathered $800,000 mortgage on a first home and wants to borrow $100,000 to buy a second home in 2020, then the interest on the $100,000 wouldn't be deductible. For more information, see IRS Publication 936.
Note that the $750,000 limit applies per tax return, so unmarried couples who buy homes together can deduct interest on up to $1.5 million of mortgage debt. Some couples in high-cost housing markets have refrained from marrying in order to double their deduction.
I'm refinancing my mortgage at a lower rate. Can I still deduct the interest?
Yes, in many cases. But current law disallows deductions on the "cash-out" portion of a refinancing unless it's used to improve a home.
Say that a borrower with a $400,000 mortgage balance refinances at a lower interest rate but raises the balance to $450,000 in order to have $50,000 for college tuition. In that case, only the interest on $400,000 would be deductible. But if she uses the $50,000 to add a room, then interest on the $50,000 would be deductible, says Mr. Liddiard.
Are "points" paid to get a mortgage deductible?
Yes. Points are upfront interest payments that typically reduce the rate. Points paid for a first mortgage are usually deductible the year it's taken out, while points paid on a refinancing typically must be deducted over the loan's term.
I want to borrow to buy a boat or RV. Can I count that as a home and deduct mortgage interest?
Maybe! Mortgage interest on debt used to buy a motor home or boat can be deductible if it has cooking, sleeping and toilet facilities. The write-off is also subject to the other requirements, such as no deductions for more than two homes.
Mortgage interest on these homes may not be deductible for the alternative minimum tax — but far fewer people owe this levy than before the 2017 overhaul.
Can I still deduct interest on a home-equity loan?
It depends. Until the 2017 overhaul, interest on up to $100,000 of home-equity debt used for any purpose was deductible.
Now, such interest is deductible if it's used to make substantial improvements to a home. The debt must be secured by the property it's used for, and the $750,000 and $1 million total debt limits apply.
Now that I'm working from home, can I take a home-office deduction?
Not if you are an employee, because the 2017 overhaul repealed that write-off. But your company can likely reimburse you for your work expenses during the pandemic and get a deduction. The payment won't be taxable to you, says Gerard Schreiber, a CPA who specializes in tax issues involving disasters.
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Workers who are self-employed, either full-time or part-time, can often deduct home-office expenses on Schedule C for a space that's used regularly and exclusively for the business. (That means no watching sports on a couch in the office during off-hours.) For more information, see IRS Publication 587.
I'm spending more time at home, and I want to remodel my house and add office space. Are there tax breaks for remodeling?
Yes, in some cases. A business owner who builds or upgrades office space at home may be able to take deductions for costs. For example, a photographer's expenses for adding a studio and darkroom to her home could be deductible over time on Schedule C, as could the interest on a borrowing to finance it.
For homeowners without businesses, the cost of improvements such as an addition can raise the "cost-basis" of the house and reduce taxable profit when it's sold. So if a house was bought for $250,000 and the owner made $150,000 of improvements, then the starting point for measuring the gain after a sale would be $400,000. The interest on a home-improvement loan can also be deductible.
Can I take money out of my IRA or 401(k) to help buy a home?
DO YOU REALLY NEED A WILL?
This year many people can withdraw more from such savings plans than in the past, and on better terms, because Congress loosened rules for people affected by the pandemic. These savers can withdraw up to $100,000 from IRAs and many 401(k)s without owing the 10% penalty that would often apply. Then they can spread the tax over three years or pay all or part of the withdrawal back, according to IRA specialist Ed Slott.
I have a city home and a vacation home, and until the pandemic I lived in the city. If I make my vacation home my primary residence, can I avoid owing city taxes?
Maybe — but rules vary widely, so seek professional advice tailored to your area. For example, people with jobs based in New York often owe taxes to New York even if they're residents of other states.
To switch your vacation home to your primary home, you may need to count days spent in each place. You may also need to make moves showing you've truly changed your residence, such as switching doctors, children's schools, your place of worship, and where you vote.
Write to Laura Saunders at [email protected]
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