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New Rules for Mortgage Interest Deduction in Washington State

This article explains how the tax cut bill could affect homeowners in Washington State, particularly those who use mortgage loans to finance their purchases.

On December 22, President Trump signed into law the Tax Cuts and Jobs Act, a comprehensive bill drafted by Republicans in the House and Senate. This bill will have 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.

Summary of changes:

  • The mortgage interest deduction cap is being 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 new 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 will allow 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.

View Today’s Mortgage Rates for Washington State Jun, 25, Tue, 2019

Seattle Homeowners Could Be Affected More

It’s worth noting that the median home price in Seattle, Washington rose above $700,000 in 2017, for the first time ever. And house values in the region are expected to continue rising over the coming months. The economists at Zillow, for example, recently predicted that the median home value in Seattle would rise by around 6% over the next 12 months.

This means that the median, or midpoint, for home prices in Seattle could soon equal the new 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

Starting in 2018, interest paid on home equity loans will only be 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 new tax bill introduces 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 going forward, these deductions will be limited to $10,000.

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Have questions? 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. Please contact us if you have mortgage-related questions.

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