ALBUQUERQUE, N.M. — Q: My husband and I are newly married and ready to make an offer on our first house. Our joint income is $110,000, and we are looking at a house that is $285,000, and we should be able to put down $20,000 to $25,000. This is a huge financial step for us, and we are excited but also nervous about the costs and using most of our savings. My question is, what tax breaks remain for owning a house? If we can get a loan at a 4.25 percent to 4.5 percent interest rate, how much will we be able to increase our tax deductions and what might that save us at the end of the year?
The good news is that the new tax law will lower your tax rate and also provide you with a larger standard deduction. This is a deduction allowed to all taxpayers without the need to prove that you incurred any actual deductions.
When you file your tax return, you claim the greater of this standard deduction or the actual allowed deductions classified as itemized deductions. Itemized deductions include things like mortgage interest, property taxes, and charitable contributions.
Beginning in 2018 taxpayers who are married filing joint will be able to claim a $24,000 standard deduction. This means that you will claim this deduction even if you do not own a home.
The bad news is that this increased standard deduction means that you should not expect any tax benefit from ownership of the home. This is so because the allowable deduction for home mortgage interest and property taxes would not be expected to be significant enough to itemize your tax deductions.
Let’s assume that the mortgage interest for your new home is $12,000 for the year. The total of property taxes and mortgage interest cannot exceed $10,000 for the year. With charitable deductions you might be able to itemize.
But even if you do itemize, the benefit will exist only to the extent the total deductions exceed the $24,000 standard deduction. I wouldn’t expect that you will be itemizing, but if you do the tax benefit will be small.
Now that I’ve depressed you, let me point out a few positive issues. Homeownership should not be for tax benefits, and I am sure that you and your husband have thought about homeownership for personal family reasons.
Hopefully, you will be able to build some equity in your home that will create economic benefits for you. You could use any equity as a way of graduating into a larger home if you build a family.
People look at homes in many ways, but I always treated homeownership as a way of meeting the needs of my family. Those needs did not include tax breaks. I may have wanted tax breaks, but I did not need them.
And there are tax breaks available when you sell the home. If you live in the home as your principal residence for two years, you will be able to avoid any tax on gain from sale. There is a $500,000 limit (per home) on this tax exclusion, but in New Mexico that means you won’t pay tax on any gains.
So my advice is to focus more on the cash flow that you will have available from your income with the standard deduction, and the expected new costs that you will incur with homeownership.
You may want to talk to other young homeowners to see what their experiences have been with the costs of ownership. Often you need new furniture to fill the added space you get with a home. You are also responsible for any maintenance and repairs.
My wife and I have owned six homes during our marriage, and we don’t regret a day of homeownership. We moved into our first home shortly after we were married. We have always enjoyed having our own place that we could make into our home.
So I think you are making a good choice, provided you plan to live in the home for a reasonable time. Even under the old tax law, the annual tax benefits of homeownership were often oversold.
Jim Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at firstname.lastname@example.org.