Mortgage Interest Deduction On The Chopping Block

President Donald Trump has proposed rewriting the tax code to raise the standard federal deduction to a level where about 25 million homeowners would no longer take advantage of the century-old break. A married couple would need a home-loan balance of about $608,000 — almost triple the mortgage on a median-priced U.S. home — before using it would make sense, according to a new analysis by property-data provider Trulia. That would be up from about $322,000 today.

Americans filing their taxes can either subtract a fixed amount from their incomes, called the standard deduction, or itemize write-offs, including mortgage interest as well as state and local taxes. The administration wants to raise the standard allowance — to $24,000 from $12,700 for a married couple filing jointly — and allow deductions for only home loans and charitable donations, greatly reducing the chances that itemizing would pay off for average taxpayers.

The proposal “is a backdoor way of rendering the mortgage interest deduction close to worthless,” said Mark Zandi, chief economist for Moody’s Analytics Inc.

‘Apple Pie’

A White House spokeswoman, Natalie Strom, said average families would be better off under the proposal. Low- and middle-income households would effectively get a tax cut, “putting more disposable income in their pockets for them to invest in a home, purchase a car, save for their children’s college — any other expense,” she said in an email.

Mnuchin called the mortgage break, which will cost the government an estimated $63.6 billion this year, “kind of like apple pie” and reiterated that Trump’s tax reforms wouldn’t touch it.

“Owning a home is something that’s been part of the American dream, and we want to keep it that way,” he said on May 1 at the Milken Institute Global Conference in Beverly Hills, California.

Fewer Itemizers

While Trump may not technically change the deduction, he would probably eliminate its usefulness for all but the most wealthy homeowners, said Joseph Rosenberg, a senior research associate for the nonpartisan Tax Policy Center.

The share of households that itemize would plunge to about 5 percent from about 30 percent now, according to a National Association of Realtors estimate. About 8 million families would itemize under Trump’s plan, a reduction of about 25 million.

Taxpayers, however, would lose an incentive to take on mortgage debt, and buyers in expensive markets who are stretching to afford fast-rising home prices may start to re-evaluate how much they’re willing to spend. In Denver and Portland, Oregon, for example, potential buyers for about half the listings would no longer be able to justify itemizing because of mortgage interest alone, according to a Trulia analysis. The share is about double the national average of 22 percent in areas including Dallas, Seattle, Boston, Washington and Sacramento, California.

The impact of the switch would be greatest for middle-income renters who are thinking about making the jump to homeownership, according to Ralph McLaughlin, Trulia’s chief economist.

Price Declines

Prices may fall 10 percent on average nationwide, taking into account the lack of deduction for state and local property taxes, according to a preliminary estimate prepared by a consultant for the National Association of Realtors. Zandi of Moody’s said the proposed deduction changes would reduce prices by about 4 percent nationally, including the property-tax impact, with bigger decreases in pricier parts of the country.

If the government’s tax policy no longer favors homeownership, some renters may decide buying isn’t worth the hassle or expense. While buying a house for $517,000 is now cheaper than renting in all 100 markets measured by Trulia, that calculation would change under the Trump plan in 12 areas, including New York City; Portland, Oregon; and Madison, Wisconsin.

Economists’ View

Economists have long been critical of the mortgage-interest deduction because it disproportionately benefits people with more-expensive properties, including many who would have purchased even without the break. It also inflates home prices because buyers often overestimate their tax savings when they’re budgeting for a purchase, said Dennis Ventry, a professor at University of California, Davis, School of Law who has studied the program’s history.

Trump’s plan might end up boosting homeownership rates over time because a drop in prices would improve affordability and the standard deduction would give buyers more money to spend on a house, Ventry said.

Trump’s plan also targets tax deductions for state and local taxes paid — a provision that would especially hurt homeowners in states where property taxes are high.

Source:  Bloomberg News