Recent discussions about the mortgage interest deductions are a welcome change, but will the new proposals create more homeowners?
It was a bit of a surprise to see NAHB’s CEO Jerry Howard quoted by Reuters as saying that the association is willing to let the mortgage interest deduction (MID) go if it is replaced with a homeowners tax credit, saying the new “more flexible” policy offers an “opportunity to help craft a unique tax policy as it is related to housing.” After all, as NAHB chairman and Texas builder Granger MacDonald noted in a press release on Oct. 3 about the unanimous vote to revise its policy by the Executive Board, “This is the first time in NAHB’s 75-year history that we have been open to the idea of broader options regarding housing tax incentives.” (Image: Stevepb via Pixabay).
In addition to forgoing its attachment to the mortgage interest deduction, the far-ranging tax policies the NAHB is promoting include:
• A homeownership tax incentive;
• The low-income housing tax credit, along with additional resources to meet the affordability crisis;
• Tax incentives for remodeling, including energy-efficiency tax credits;
• The exclusion of capital gains on the sale of a principal residence; and
• Business interest deductions for small businesses.
This is a welcome change, and one that many hope comes to fruition. The mortgage interest deduction has been a bone of contention in the country for some time. Touted as an incentive that promotes homeownership in general, its beneficiaries are mostly in the upper income brackets. Figures from the Congressional Budget Office reveal that 73 percent of mortgage interest tax deductions go to taxpayers earning more than $100,000 a year. The deduction is available only to taxpayers who itemize, which is about one-third of all taxpayers. And only one-quarter of the approximately 64 percent of Americans who are homeowners use the deduction.
Nevertheless, benefits from the MID will amount to an estimated $80 billion a year in deductions for taxpayers over the next decade, which is nothing to sneeze at, especially when the current administration is planning to cut taxes and does not want to add to the deficit.
The nuts and bolts of the tax reform plan are still being debated and it’s hard to know where it will end up. As of mid-October, the proposed tax plan does not completely do away with the mortgage interest deduction. Instead, it offers a doubled standard deduction—which would reduce the number of taxpayers who itemize to around 5 percent from the current approximately 30 percent who do—and the elimination of state and local tax deductions, such as property taxes. Those changes would prevent many homeowners from claiming the MID, as they wouldn’t have enough deductions
to make it worthwhile to itemize.
According to research from Zillow, a new homebuyer would have to purchase a home worth more than $801,000 in order for itemizing and the mortgage interest deduction to make financial sense. Currently, only 5 percent of homes in the U.S. cost that much or more. This change makes it even harder to argue that the deduction would help a large number of average Americans become homeowners.
During the campaign, President Trump vowed to protect the mortgage interest deduction, and that may be why it remains a part of the new plan. But some lawmakers suggest keeping it but taking a different tack—leaving the deduction in place, but capping it at $500,000, for example, where it might serve as an actual incentive for first-time, lower income, and even some move-up buyers to purchase a home.
Undoubtedly, there will be a lot more discussion before the tax reform plan reaches its final form, but it does seem as if the conversations we are having now about housing policy are moving in the right direction.