Tax reform has caused some homeowners to increase their budget for home renovations. But confusion over tax deductions on interest paid on a home equity line of credit or home improvement loan has some seeking other ways to pay for the projects.
Pulling profits out of the stock market can allow some people to pay for home improvements or come up with at least part of a down payment to buy a home. Stock market volatility, however, can make that difficult, even if it’s only short-term fluctuations.
A survey by LightStream, a part of SunTrust Bank, found that 18 percent of homeowners who had set a budget for renovations said that tax reform had caused them to increase the amount they plan to spend in the coming year. Seven percent decreased their budget in light of tax reform, the survey found.
It found that 45 percent of homeowners are spending $5,000 or more on their projects. The number of people planning to spend $35,000 or more on renovations doubled since last year’s survey.
How are they planning to pay for the renovations? While respondents could list multiple payment methods, they listed these as their top methods:
- Savings: 62%
- Credit card: 30%
- Home equity line of credit: 13%
- Home improvement loan: 9%
- Liquidate or tap into investments: 5%
- Other: 10%
Here are some of the ways homeowners and buyers may be affected by the new tax laws when paying for home renovations or buying a home:
Profits from the stock market
More than half — 52 percent — of people looking to buy a home plan to use stock market proceeds to fund at least part of their home purchase, according to a February survey by Move, Inc., a real estate digital information and resource firm.
Of those planning to use stock, 90 percent said that the stock market run up contributed to their decision. The most common types of stock people are planning to use include stock, mutual funds and retirement accounts.
Selling stock at a profit can lead to having to pay a capital gains tax. While those rates didn’t change under the new tax plan, tax rates for long-term capital gains and qualified dividends now apply to specific income thresholds because the general income tax brackets have changed, says Josh Zimmelman, owner of Westwood Tax & Consulting in New York.
Those income thresholds and tax rates for long-term capital gains are:
- Single with income up to $38,600: 0% rate
- Married with income up to $77,200: 0%
- Single with income between $38,601 and $425,800: 15%
- Married with income between $77,201 and $479,000: 15%
- Single with income above $425,800: 20%
- Married with income above $479,000: 20%
For short-term capital gains when selling a stock held for less than a year, your regular tax rate, which can be as high as 37 percent, applies, says Lydia Desnoyers, a certified public accountant in Miami.
“Very little has changed as far as investments for individuals,” says Desnoyers, who hasn’t seen many of her clients use stock proceeds to pay for a down payment on a home.
Home equity loan changes
Under previous tax laws, interest on home equity loans or a home equity line of credit, or HELOC, could be deducted up to $100,000. That has been eliminated. The change runs through 2025.
The loans were often used to make home improvements, but could have been used for anything — from paying down credit card debt, college expenses or a vacation. A home equity loan was an incentive for people to buy and repair homes, Desnoyers says.
Now, the home equity loan or line of credit must be used to substantially improve the home for the interest paid on it to be tax deductible.
To deal with confusion on whether interest on home equity loans is still deductible under the new law, the IRS issued a news release in February stating that it still is, regardless of how the loan is labeled, including as a home equity loan, HELOC or second mortgage.
The deduction on interest paid on home equity loans and lines of credit is suspended until 2026 unless they’re “used to buy, build or substantially improve the taxpayer’s home that secures the loan,” according to new IRS guidelines on home equity loans.
Interest on a loan to build an addition to a home is typically deductible, it says, but using it “to pay personal living expenses, such as credit card debts, is not.”
Home mortgage interest deduction lowered
For homebuyers taking out a mortgage, the new law lowers the limit on mortgages qualifying for the home mortgage interest deduction. Interest on mortgage loans up to $750,000 is deductible, down from $1 million in loans previously.
The limits apply to the combined amount of loans to buy, build or substantially improve the taxpayer’s main home and second home, according to the IRS.
When refinancing mortgage debts existing on Dec. 14, 2017, up to $1 million in refinancing can be done and the interest still deducted, as long as the new loan doesn’t exceed the amount of the mortgage being refinanced.
Impacts on home prices
Less tax deductions for homeowners could also cause home prices to drop if demand falls.
The National Association of Realtors expects home prices to increase by 1.9 percent on average in 2018, which is well below the 5-7 percent annual gains in the past five years.
Home buyers could benefit in other ways from the tax changes.
“In the short term, the larger paychecks most households will see from the tax cuts may give prospective buyers the ability to save for a larger down payment this year, and the healthy labor economy and job market will continue to boost demand,” said Lawrence Yun, NAR chief economist, in January.
“However, there’s no doubt the nation’s most expensive markets with high property taxes are going to adversely impacted by the tax law,” Yun said.
The new law limits an itemized deduction to $10,000 for the total of state and local property taxes and income or sales taxes. The limit applies to both single and married filers. Previously, most taxpayers could deduct state, city and real estates taxes in their entirety.
“Just how severe is still uncertain,” Yun said of the impact of areas with high property taxes, such as California and New York, “but with homeownership now less incentivized in the tax code, sellers in the upper end of the market may have to adjust their price expectations if they want to trade down or move to less expensive areas. This could in turn lead to both a decrease in sales and home values.”