Thoughts on the proposed Tax Reform Plan as it relates to the Mortgage Interest Deduction

I read an interesting article this morning, and it inspired me to Blog my thoughts on this proposed tax reform and specifically to changes in the mortgage interest deduction.

For weeks, the media and pundits alike have blasted proposed changes tax reform plan and specifically to the mortgage interest deduction, suggesting it will make home ownership unaffordable for millions of Americans and sway renters to continue to rent rather than pursue the American dream of Home Ownership. To me, most of this concern is simply noise without substance. Here's why:

- First, let’s remember that the plan is still in the early stages. Both House and Senate Republicans have now unveiled their versions of the tax reform plan, but the GOP in both chambers will have to reconcile differences between their two versions of the plan. Then, they have to each pass a cohesive bill before Trump signs it into law.

- The Senate’s plan keeps the popular mortgage interest deduction untouched; the House plan calls for a $500,000 cap on how much interest homeowners can deduct on their income taxes. That $500K cap is far more than the average American pays in mortgage interest in a year. In fact, it likely only affects the wealthiest Americans in the Top 1% of earnings and Real Estate values in America.

- Small businesses may benefit: The plan calls for a cut in the percentage of tax paid by small businesses, which often take the brunt of high taxation and suffer most during a downturn. Granted, slashing taxes will not automatically create an upsurge in hiring. But, it can ease the burden for entrepreneurs and mom and pop shop owners who are the backbone of the American economy. Like I’ve said before, when businesses are healthy and stable, the economy flourishes. When the economy thrives, more people buy homes.

- Secondary Decision Motive: As far as the mortgage interest deduction is concerned, let’s keep in mind that it’s never been a significant motive for buying a house. When I speak with potential buyers, very few indicate that taking advantage of the mortgage interest deduction is something that drives their purchasing decision. I would assert that most people buy homes because it represents security and a way to build wealth and a sense of stability.

- It won’t affect everyone: In 2012, only about a quarter of taxpayers claimed the deduction, according to a USA Today analysis of data from the Internal Revenue Service. For many homeowners, the deduction has never been a big factor at tax time. Remember, it’s only available to taxpayers who itemize on their tax returns, and most Americans don’t (a 2016 study from the Tax Foundation shows that just 30 percent of U.S. households itemize). Plus, homeowners only reap the full benefit of the deduction if their total deductions for mortgage interest, charitable giving and other expenses are worth more than the standard deduction.

- The mortgage interest deduction is most useful in states like California and New York, where home prices and tax rates are significantly higher than the rest of the country. That’s probably why the National Association of Realtors has come out against any change to the deduction, saying it feels weakening the deduction will hurt middle-class homeowners. But HousingWire suggests that reducing the deduction will yield positive results because lower taxes for middle-class renters will help them save for a down payment.

The bottom line

There's no doubt that tax breaks enhance the perks of home ownership. But, overall, the deduction only benefits Americans in the highest tax bracket with larger loans. Therefore, it’s unlikely the deduction will ever be a main driver of home ownership or the decision to Buy vs Rent. Thanks to a variety of assistance programs and special loan products, buying a house is still very accessible to individuals in any social class.