The American dream of owning a home has been a mainstay in the economy for well over 60 years. The U.S. Government has helped millions of Americans realize this dream with some great income tax benefits since 1986 but this may be coming to end soon.
The Trump administration revealed its new Tax Reform Bill which will most likely result in fewer people qualifying for mortgages and lower homeownership levels across the nation. The bad news for many Americans is that under the new plan, there would be a cap on the mortgage-interest deduction which allows homeowners to subtract interest payments from their taxable income.
For example, under the reforms, new homebuyers will be able to deduct up to $500,000 in mortgage debt on their primary residence, down from the current $1 million limit but it keeps the $1 million cap for existing homeowners. In addition, the plan eliminates all state and local deductions, while the House proposal retains property tax deductions up to $10,000.
On the surface, it is a fair deal for many homeowners who have a mortgage between $500,000 and $1 million because they will still be able to deduct all of their mortgage interest. But if they sell and buy another home in a similar price range or more expensive, they will not be able to deduct as much of my interest as they do with their current home.
What is going to happen now that these mortgage interest rate deductions are being practically eliminated, more Americans will decide to stay in their current homes rather than buy another home because they can keep their deductions. All the while, many potential homebuyers in high priced housing markets will no longer be able to qualify for a home loan.
Simply put, this new tax plan will devastate residents in high-cost states such as California, Washington, and New York along with other high-cost areas, who have relied on these itemized deductions for state, local and property taxes.
As expected, this news has caused professionals in the housing sector in a panic.
Obviously, these dramatic changes will have an impact on the most expensive housing markets which equate to lower home values. In addition, real estate professionals will see fewer sales which will equate to a lesser demand for their services.
The National Association of Realtors (NAR) President, William Brown said in a statement; “Eliminating or nullifying the tax incentives for homeownership puts home values and middle-class homeowners at risk, and from a cursory examination this legislation appears to do just that.”
In an article on Business Insider titled, “The GOP tax plan has the real-estate industry in a panic and talking about housing recessions,” the CEO of the National Association of Home Builders said, “You’re talking about potentially causing housing recessions.”
Real estate professional, Joseph Rand writing for Inman News said,
“It’s almost a joke, a pastiche of anti-housing policies, a ghastly tapestry stitching together a patchwork of terrible ideas that are going to severely depress real estate markets across the country at a time when homeownership is already at a historic low of 63.9 percent.
Why? Well, it’s bad enough that the tax bill will negatively impact property values by reducing the mortgage interest deduction, changing the capital gains extension on residences, capping property tax deductibility and some other terrible stuff. That’s bad for homesellers, homebuyers, homeowners — and us — because what’s bad for all of them is usually bad for us.
But even worse than that, the new bill actually makes it more expensive to move! And that’s not good. We want people to move. We make our living when people move.”
Why is the U.S. Government elimination these real estate tax deductions?
It all comes down to more revenue to fund the government.
According to the Treasury Department, between FY 2017 through FY 2026, the government will lose approximately $896 billion because of the mortgage interest deduction and another $487 billion due to property tax write-offs.
That equates to $1.4 trillion in a tax windfall for the U.S. Government over the next decade.