Proposed Tax Code Changes Will Impact Mortgage Interest Deduction

December 6, 2016

One of the upsides of such a complex tax code is that mortgage interest payments are a deduction, which, housing industry leaders say, incentivizes homeownership and turns renters into buyers.

The new presidential administration, though, is looking to simplify tax filing, and a proposed plan will alter deductions. CNBC reports that a new plan will reduce the number of tax brackets, increase the standard deduction, and place a cap on itemized deductions.

Let's say a single filer pays about $10,000 in mortgage interest in the first year they own a home. That far exceeds the current $6,300 standard deduction, so they itemize their deduction to claim a greater tax break. It's one reason they decided to buy rather than rent. But under Trump's plan, they're better off taking the standard deduction. Their taxes are simpler, but no longer significantly different than if they had rented. That's why industry groups are watching closely.

While some housing experts say that the plan will keep potential homeowners on the sidelines, other economists argue, according to CNBC, that mortgage interest deductions do not motivate people to buy homes. Instead, deductions encourage people to spend more on a house. A new tax plan, then, may bring down home prices, especially in expensive markets like New York City and San Francisco.

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