Real estate professionals revolted when the House GOP tax bill released last week called for chopping from $1.1 million to $500,000 the amount of mortgage debt taxpayers can deduct interest on. Granger MacDonald, chairman of the National Association of Home Builders, went as far as saying the plan “abandons middle-class taxpayer.” In a nod to political reality and the proverbial American dream, in their tax proposal released Thursday, Senate Republicans merely shaved the total eligible debt by $100,000 to $1 million.
But the real estate industry still isn’t happy.
A new analysis of both the House and Senate plans from home listing site Zillow shows why: both tax plans nullify the benefits of the mortgage interest deduction for most homeowners by increasing the standard deduction and eliminating deductions for state-and-local income and sales taxes. Moreover, while the House bill would allow up to $10,000 of property taxes on a home to be deducted, the Senate plan allows no property tax deduction at all. These result is that even fewer homeowners would benefit from itemizing and claiming a mortgage interest deduction under the Senate plan than under the House plan.
According to Zillow, 44% of homes in the U.S. are worth enough, and carry high enough tax bills, that a new buyer, borrowing 80% of the purchase price, would benefit from itemizing–that is deducting mortgage interest and taxes. Under the House plan, that 44% falls to just 12%; under the senate plan it goes even lower–just 7% of new buyers would get any benefit from deducting mortgage interest.
“While the Senate’s proposed tax bill makes the MID [mortgage interest deduction] whole on paper by raising the cap back to $1 million in deductible interest, champions of the deduction won’t exactly be breathing a sigh of relief,” notes Zillow Senior Economist Skylar Olsen. “Under the Senate bill, Zillow’s analysis shows that in most places, even fewer households would itemize deductions, meaning an even smaller sliver of homeowners would benefit from the MID, rendering the MID a much more niche tax benefit. That is sure to cause a stir among industries that rely on widespread use of the MID.” In 2015, itemized deductions were claimed on 39.6 million taxable returns, according to the most recent IRS data available. The mortgage interest deduction was claimed on 29.77 million taxable returns.
As the law stands now, homeowners can claim as an itemized deduction interest paid on mortgages valued up to $1.1 million used to acquire or improve a first and/or second home. People who build and sell homes have long argued that the tax incentive facilitates homeownership by making it more affordable. Nevertheless, the deduction, which dates in one way or another to the first modern federal income tax created in 1894, has long been controversial. Liberal groups argue it disproportionately benefits wealthy and white people. Conservative budget hawks say it costs too much–$77 billion last year. Nevertheless, it has long been popular with taxpayers.
Like the House bill, the Senate version would roughly double the standard deduction. So if the law were in effect for 2017 tax year the standard deduction for an individual would jump to $12,000 from $6,350 under current law. For married couples it would go to $24,000 from $12,500. Meanwhile, the Senate plan also eliminates deductions for all state and local taxes, including local property taxes, which the House plan would cap at $10,000.
In tax reform discussions during the 2016 campaign, then-candidate Donald Trump put mortgage interest–and all other itemized deductions–on the chopping block as part of promises to simplify the tax code and close loopholes. But by the time the White House released its framework proposal in April, mortgage interest was spared along with the charitable deduction. Then, last week, the House plan shocked the industry by slashing the cap to $500,000 for future home purchases. Many worried this would crush demand in expensive markets, also hit by a severely trimmed property tax deduction, and that it would hinder first time buying in particular. Now, in response to the new Senate plan, the industry is returning to the arguments it made in April.
NAHB’s MacDonald was more measured in his response to the Senate bill, calling it a “positive development” and praising components like small business tax cuts. On housing he just said: “We still believe that maintaining an effective homeownership tax benefit is vitally important.” Elizabeth Mendenhall, the newly installed president of the National Association of Realtors, went a step further, arguing, “Simply preserving the mortgage interest deduction in name only isn’t enough to protect homeownership.”