How tax reform will impact mortgage deductions
Tax reform and real estate: winners and losers
The great tax reform debate is moving along on Capitol Hill, and everyone wants to know who wins and who loses. In terms of real estate, the big issue is what will become of the write-offs for the mortgage interest deduction and property taxes.
What we have at this stage are separate tax reform bills that have passed the House and the Senate. What we wind up with may be different, probably a compromise between the two. There is still a lot of negotiating to be done and it’s actually possible that a final bill could fail.
While the fate of real estate write-offs is unknown the two proposals are fairly close when it comes to the treatment of mortgages and property taxes.
The catch is that it may not matter if deductions for mortgage interest and property taxes are kept or not. The details are in the fine print – and some of the fine print is ugly.Verify your new rate (Dec 13th, 2017)
Tax reform and the mortgage interest deduction
The National Association of Realtors (NAR) estimates that more than 32 million tax returns claim the mortgage interest deduction (MID). The typical deduction is $8,033 which means for taxpayers in the 25 percent bracket, taxes are reduced by a little more than $2,000.
In a general sense, both bills leave the MID largely untouched. The House proposal limits the deduction to the interest on not more than $500,000 in new real estate debt, while the Senate bill keeps the current $1 million limit.
This sounds pretty good for most borrowers, but homes worth more than $500,000 are fairly common in a number of states. According to NAR, almost half the homes in California and 63 percent of the properties in Hawaii are worth at least $500,000. In high-cost areas, a $500,000 interest cap could reduce real estate demand and thus home values.
The MID write-off would only apply to a primary residence under the House proposal. Interest on new financing for a vacation home would not be deductible. If passed, this will be a problem in states with large tourist and vacation areas – think of Alaska, Maine, New Hampshire, Vermont, and Florida.
Right now, borrowers can deduct the interest on as much as $100,000 in home equity financing. The Senate bill would end this write-off.
Tax reform and property taxes
According to the think tank Tax Foundation, the Senate and House proposals “both retain the state and local tax property tax deduction, capped at $10,000.”
Many taxpayers, if the reform proposals pass, would be able to keep their property tax deduction. However, those in areas with high-cost properties and steep tax rates might find that all of their property tax costs are no longer deductible.
Why real estate deductions may not matter after tax reform
So far it seems that the mortgage interest write-off and deductions for property taxes are untouched for most borrowers. However, there is much more to the proposals.
Write-offs for property taxes and mortgage interest only have value if you take them. Under tax reform, the odds are overwhelming that most borrowers will not claim real estate deductions. Here’s why:
Under today’s tax system, you can take either the standardized deduction or you can itemize. In 2017, the standard deduction for a married couple filing jointly is $12,700. This increase means that more people will take the standard deduction instead of itemizing, because it's bigger than their total deductions, including mortgage interest.
The big print gives, the small print takes
Under the tax reform proposals, the standard deduction will jump to $24,000 for a married couple. Many of those who now itemize will switch to the standard deduction.
It is true that the standard deduction becomes much bigger under tax reform. If the trade was a larger standard deduction for an end to itemized deductions, that would be great for many taxpayers -- but that’s not the whole story.
First, under the House version of tax reform, the personal exemption goes away. The personal exemption is $4,050 per person, $16,200 for a family of four. The personal exemption phases out as income rises.
Second, fewer itemized deductions are allowed. The House proposal eliminates medical deductions and write offs for moving expenses. The Senate tax reform proposal allows medical deductions for just the next two years.
The result of these changes is that if the reform measures pass, most people will not claim itemized write-offs, therefore they will not be able to use the mortgage interest deduction. According to the Tax Policy Center, “Only 4 percent of households would claim the deduction, down from 21 percent under current law.”
If people can’t itemize, they also can’t claim state and local income tax deductions or property tax write-offs. In effect, the debate about real estate write-offs only impacts those who will be able to itemize.
What are today's mortgage rates?
Today's mortgage rates are trending slightly higher, but still about where they have been since October. Investors and lenders seem to be waiting for the passage or failure of the new tax bill before making any drastic changes.Verify your new rate (Dec 13th, 2017)
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