In part one of this article, we examined the types of reforms being proposed and the potential loss of the property tax deduction. Now we look at the mortgage interest deduction and the main issues with current proposed reforms.
Neither the Ryan plan nor the Trump proposal eliminates the mortgage interest deduction. In fact, they both keep the MID visibly in place.
However, if you look very carefully, the mortgage interest deduction will disappear for millions of homeowners. Here’s how the new MID rule will work if one of the current proposals passes.
“We are going to double the standard deduction so that a married couple won’t pay any taxes on the first $24,000 of income they earn,” says the White House regarding the Trump plan. “So in essence, we are creating a 0% tax rate for the first $24,000 that a couple earns.”
“The larger standard deduction,” it continues, “also leads to simplification because far fewer taxpayers will need to itemize, which means their tax form can go back to that one simple page.”
The standard deduction under the Trump proposal will be so large that most households will not itemize. Where is mortgage interest written off? On Schedule A, itemized deductions. If most taxpayers don’t use Schedule A they’re not taking the mortgage interest deduction. They can take the mortgage write-off in theory but in practice it will make more sense for most taxpayers to take the far-bigger standard deduction.
The Ryan plan offers a similar approach. It proposes a standard deduction that will be “$24,000 for married individuals filing jointly, $18,000 for single individuals with a child in the household, and $12,000 for other individuals. These amounts will be adjusted annually for inflation.”
The result, according to the Ryan plan, is that “far fewer taxpayers will choose to itemize deductions, with the vast majority of taxpayers finding they are better off by taking advantage of the larger, simpler standard deduction instead.”
Again, few people will take itemized deductions in such a scenario.
Why does it matter?
One problem for real estate under the Ryan and Trump proposals would be the loss of write-offs worth more than $1 trillion over ten years, about $100 billion a year.
A study for the National Association of Realtors by PWC, a major consulting firm, estimates that between FY 2018 and FY 2017 write-offs for “mortgage interest and property tax deductions would fall from $1.3 trillion under present law to $232 billion under the comprehensive tax reform option, or by 82 percent.”
But is this really a big problem? Do people buy homes specifically because of the benefits of the mortgage interest deduction? There are any number of other reasons including status and ego but surely tax write-offs are a big attraction.
“The tax benefit is a big difference between renting and owning, and has been a big benefit of homeownership,” said Rick Sharga, executive vice president at , the online real estate marketplace. “Having the mortgage interest deduction has enabled some renters to become first time home owners, and helped others afford bigger and more expensive homes for their families. Eliminating the deduction at a time when home prices and interest rates are both trending up could have a material impact on affordability for many consumers.”
The Ryan and Trump plans strip away one of real estate’s most important selling points, the ability to lower housing costs through ownership tax deductions. Should such proposals pass a major distinction between ownership and renting will be largely gone. If that’s the case, owning will effectively be less enticing than in the past, a reality which will slow home sales. With fewer buyers in the market there will be less pressure to raise prices, less equity to refinance, plus with fewer transactions and lower values state and local tax coffers will be starved. All in all, not good news for the housing market.
Is tax reform good for real estate? Part one