There are several important factors you should consider before you refinance your mortgage this year, including current rates and your financial situation.
Summary: This article explains how the tax cut bill could affect homeowners in Washington State, particularly those who use mortgage loans to finance their purchases.
Not long ago, President Trump signed into law the Tax Cuts and Jobs Act, a comprehensive bill drafted by Republicans in the House and Senate. This bill has far-reaching effects on Americans all across the income spectrum. It’s also a confusing topic because there have been multiple versions of the bill leading up to its passage.
Let’s go into more detail to help you better understand what this tax law is and how it will affect you when buying a home in Washington.
Summary of changes:
- The mortgage interest deduction cap has been lowered to $750,000.
- State and local property, sales and income tax deductions are capped at $10,000.
- The standard deduction has been roughly doubled.
Mortgage Interest Deductions in Washington State
The legislation will lower the maximum amount of mortgage interest that homeowners can deduct from their taxes. This provision could affect quite a few homeowners in Washington, particularly in the more expensive real estate markets like Seattle.
Republicans in Congress went back and forth over this provision, with the House and Senate creating their own versions. In its final version, the Tax Cuts and Jobs Act allows eligible homeowners to deduct interest paid on mortgage loans up to $750,000. That’s a reduction of $250,000 from the previous cap of $1 million.
Granted, most homes across Washington State are priced below $750,000. So the mortgage interest deduction shouldn’t affect the “average” homeowner in most parts of the state. But in places like Seattle, where property prices can be much higher, some homeowners could have their mortgage interest deceptions capped at a lower level.
The good news for people with existing loans is that these changes will only apply to new home loans. So homeowners who took out their mortgages before the new tax bill was passed should be able to enjoy the same level of deduction. In other words, it’s grandfathered.
Seattle Homeowners Could Be Affected More
It’s worth noting that the median home price in Seattle, Washington now sits at $767,900, which is much higher than the statewide average of $428,900, according to the economists at Zillow. Over the past 12 months, home prices in Seattle increased 2.2%.
This means that the median, or midpoint, for home prices in Seattle is higher than the limit for mortgage interest deductions. So, there could be quite a few homeowners with mortgage loans that exceed the deduction limit. And these are the folks who could lose some of their benefits.
Related: New rules for property taxes
Deductions for Home Equity Debt
As of 2018, interest paid on home equity loans are only tax deductible in certain scenarios. This is another key provision of the Tax Cuts and Jobs Act, and it’s one that could affect many homeowners across the state of Washington.
In the past, homeowners who took out equity loans were allowed to deduct the interest from their taxes, up to $100,000. Under the new tax bill, this deduction will only be allowed in cases where the funds are used to improve the home (like a new addition or a kitchen renovation).
And unlike the mortgage interest deduction, which only applies to new loans, there is no grandfathering clause with this home equity provision.
In addition to these mortgage-related changes, the tax bill introduced other changes that could affect residents across Washington State. It limits the amount of property taxes, and state and local income tax, that a person can deduct. In the past, there really wasn’t a limit. But now, these deductions are limited to $10,000.
Have Questions or Need a Home Loan in WA State?
Sammamish Mortgage is a local, family-owned company based in Bellevue, Washington. We serve the entire state, as well as the broader Pacific Northwest region including OR, CO and ID. We provide a variety of mortgage programs with flexible criteria, and we’d love the opportunity to help you apply for a home loan. Please contact us if you have mortgage-related questions.