A Word Homeowners Need to Understand

What is your mortgage balance? Well, that is one answer, but the new tax law has a very specific reference for the term Acquisition Debt as it relates to Phoenix Metropolitan home owners, and others around the country. So read on to learn more, then talk to you tax adviser as to the effects this will have on re-financing your current  mortgage, or buying a new home here, in Chandler or in another part of the country.

Acquisition Debt is the amount of money borrowed used to buy, build or improve a principal residence or second home. Under the new tax law, mortgages taken after 12/14/17 are limited to a combination of $750,000 on the first and second homes. The mortgage interest on this debt is tax deductible when itemizing deductions.

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It is a dynamic number that is reduced with each payment as the unpaid balance goes down. The only way to increase acquisition debt is to borrow money to make capital improvements.

Prior to the new law, homeowners could additionally borrow up to $100,000 of home equity debt for any purpose and deduct the interest when itemizing deductions. Mortgage interest on home equity debt is no longer deductible unless it is for capital improvements.

Acquisition debt cannot be increased by refinancing. Some confusion occurs because mortgage lenders are concerned in making home loans that will be repaid according to the terms of the note and using the home as collateral. That does not include making a tax-deductible mortgage.

Another thing that adds confusion to the issue is that the lenders will annually report how much interest was paid in a year but only the amount that is attributable to acquisition debt is deductible.

Even if the interest on the cash-out refinance is not deductible, it may be advantageous to pay off higher interest debt such as credit card debt and replacing it with lower mortgage debt.

It is the responsibility of the taxpayer to know what part of their mortgage debt is deductible. The challenge becomes more difficult after a cash-out refinance. Homeowners should keep records of all financing and capital improvements and consult with their tax professional.

The key here is to consult with your Denver tax adviser BEFORE a re-finance to find out the effects on your tax return. Most good loan officers will be able to answer the question, but a tax adviser is best. To find either a tax adviser or a loan officer CONTACT US TODAY.

CALL 480-355-8645 or EMAIL Gina@LocateArizonaHomes.com

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We see Fair Skies on the Horizon

Some buyers I have talked to have expressed concern about how the new tax laws will affect home ownership. However, looking at the 2017 Tax Cut and Jobs Act passed by Congress and signed by the President; we see that it continues to treat real estate as a favored investment.

Tax laws are in place whether you are considering a home to either live in as your primary residence or to use as a rental property.  There are other dynamics to be concerned about that are not, like rising mortgage rates and home prices.

Reasons to consider buying now…

Mortgage interest deductions remain intact for most taxpayers.  Capital gain exclusion for principal residences up to $500K for married couples, $250k for singles also remains in place.  Taxpayers can elect annually to take a newly increased standard deduction or itemize deductions depending on which will benefit them the most.  Therefore you can see what fits your financial situation best.

Most studies in the Phoenix area show that a house payment, including taxes and insurance, will likely be cheaper than paying rent.  Rental rates have continued to skyrocket, so in the future that difference will be even greater.

If you’re thinking about renting vs. purchasing, keep in mind that with a 30 year fixed rate mortgage (which most borrowers are eligible for) the interest rate will lock in your principal and interest payment for the term of the mortgage.  That means that your monthly payment will not increase for the term of the mortgage versus renting with a lease that will potentially increase every year. It’s better to lock in a fixed payment sooner rather than later.  I have seen our home prices go up following a decrease in housing inventory levels over the last four years. Coupled with interest rates continually rising over the last six weeks, this will drastically change how much home you can afford in the near future.

Under the new tax law, there were no changes towards rental properties.  You can still take depreciation and write off expenses, or do a Section 1031 exchange to defer capital gains. I’ve used a 1031-exchange in the sale of one rental property to purchase two rental properties instead of just one.  It’s still a great way to build wealth and increase passive income.

Let us know if you are considering buying or selling and if you have any questions on the new tax laws.  We have tax consultants we would be happy to refer you to.  Contact us today! 480-355-8645 or Info@LocateArizonaHomes.com


Convincing Advantages with Standard Deduction

Lots of folks  are asking what are the new tax laws going to do to my taxes?

Read on. Then contact me if you need more.

The new tax law doubles the standard deduction and it is estimated that over 90% of taxpayers will elect to use it. However, even without considering tax benefits, homeownership has convincing advantages.

Besides the personal and social reasons for owning a home, one of the most compelling is that it is cheaper. Principal reduction and appreciation are powerful dynamics that reduce the effective cost of housing.

Amortized loans apply a specific amount of each payment to the principal amount owed to retire the loan over the term. Some people consider it a forced savings account; when the payment is made, the unpaid balance is reduced.

The price of homes going up over time is appreciation. While there are lots of variables and it is not guaranteed, it is easy to research the history of an area and make predictions based on supply and demand.

Interest rates are still low and can be locked-in for 30 years. Without considering the tax benefits at all, the appreciation and the amortization dramatically affect the “real” cost of owning a home.

Consider a $250,000 home that appreciates at 2% a year for the next seven years instead of paying $2,000 a month in rent. In the example, the payment is less than the rent being paid even including the property tax and insurance.

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When you factor in the monthly principal reduction and appreciation and consider additional owner expenses like maintenance and possible homeowners association, the net cost of housing is considerably lower than the rent. In this example, reduced cost in the first year alone is more than the down payment required on a FHA loan.

Based on the assumptions stated, the down payment of $8,750 could grow to $73,546 in equity in seven years. Can you name another investment with this kind of potential that also provides you a place to live, enjoy, raise your family and share with your friends?

Use this Rent vs. Own to make projections using your own numbers and price range. We’re available to answer any questions you have and to find out what it will take to own your own home.

We would love the opportunity to help you with any questions you may have about the new tax laws! 

Please call (480-355-8645) OR email Info@LocateArizonaHomes.com.

We look forward to hearing from you!