The mortgage interest rate deduction has always been a selling point for those on the fence between continuing to rent or jumping into homeownership. While not the determining factor, the deduction is an influencing dynamic for buyers and an overall bonus of investing a large sum of their assets into a home.
Currently, the tax break allows homeowners to deduct up to $1 million in interest spent on their mortgage debt, for their primary residence and one additional dwelling. The break also applies to mortgage interest on home equity loans or lines of credit, with a debt threshold of $100,000. While the break is not currently set to be removed, the Republican tax reform plan could restrict the way this tax deduction is applied, rendering it irrelevant to 95 percent of the U.S. homeowner population.
The Trump Administration and Congressional leaders are endorsing a tax overhaul that would double the standard deduction and remove breaks for state and local taxes, including property taxes. This plan could dramatically increase the number of taxpayers who choose to take the standard deduction instead of continuing to itemize deductions and opt for the mortgage credit.
“The tax reform proposed by the Republican leadership will eliminate the incentive for people to buy homes, shrink the middle class and raise taxes on hundreds of thousands of California homeowners,” said California Association of REALTORS® President Geoff McIntosh following the White House announcement. “The doubling of the standard deduction, coupled with the elimination of state and local tax deductions, such as property taxes, will adversely impact California and its housing market. The average California homebuyer could end up paying $3,000 more a year in taxes under [the] proposal.”
According to an analysis by Zillow, about 30 percent of U.S. homes—those worth $305,000 or more—are currently valuable enough for the mortgage tax deduction to be worthwhile. This number would drop to just 5 percent with the proposed tax plan, skyrocketing the price of an eligible home (deduction-wise) to $801,000 or more.
Critics’ steadfast belief is that the mortgage interest rate deduction only helps the wealthy. The National Association of REALTORS® (NAR), however, says otherwise, reporting 7 million taxpayers took advantage of the deduction in 2015. If the deduction is weakened, critics’ assumptions will turn to reality and the real estate market could see a drop in buyer activity as the tax break incentive would no longer be beneficial for the majority of homeowners.
“No matter how the GOP messages this plan, it is nothing more than an upward redistribution of wealth,” says Alan Essig, executive director of the Institute on Taxation and Economic Policy. “The plan boosts the incomes of the wealthy with surgical precision, but gives a pittance to most working people. And it would tax some in the middle and upper-middle class more, essentially creating an even greater economic divide between the rich and everyone else.”
Click Here to read remainder of article
