Wednesday afternoon the White House released what it is calling a “first draft” of President Donald Trump’s promised tax-cut plan. The outline, which fits on a single page, largely adheres to pledges Trump made on the campaign trail, as well as to the details that have slipped out in the frenzied days leading up to the announcement.
The release does confirm that the president would like to preserve the home mortgage interest deduction, while doubling the standard deduction—two points of particular interest to homeowners, buyers and the real estate industry at large.
As it stands now homeowners can deduct interest paid on mortgages with values up to $1.1 million. This deduction lowers the amount of income a person needs to pay tax on and, in effect, lowers the cost of owning a home. (It was not immediately clear if Trump intends to change the cap.) In 2014, 32 million people claimed $279 billion in mortgage interest deductions. That’s about $8,718 in deductions each for a savings of $2,173, according to the National Association of Realtors.
The mortgage interest deduction is one of just two the proposal promises to protect. The other is for charitable donations. Both popular deductions can only be taken if a taxpayer itemizes. If not they take the standard deduction, which for an individual was $6,300 in 2016 and is adjusted annually for inflation. Under the proposal the 2016 deduction would have been $12,600.
While on the surface maintaining the mortgage deduction might sound like good news for the home-buying industry, real estate agents and home builders are not pleased.
In a statement released shortly after the proposal was made public the National Association of Realtors argued that increasing the standard deduction and erasing other deductions would “effectively nullify the current tax benefits of owning a home” for most people.
“The mortgage interest deduction and the state and local tax deduction make home ownership more affordable, while 1031 like-kind exchanges help investors keep inventory on the market and money flowing to local communities,” said NAR President William Brown. “Those tax incentives are at risk in the tax plan released today. Current homeowners could very well see their home’s value plummet and their equity evaporate if tax reform nullifies or eliminates the tax incentives they depend upon, while prospective homebuyers will see that dream pushed further out of reach.”
National Association of Home Builders Chairman Granger MacDonald echoed this sentiment. Noting that “doubling the standard deduction could severely marginalize the mortgage interest deduction, which would reduce housing demand and lead to lower home values.”
More broadly, in a conversation last week Ralph McLaughlin, chief economist at home search site Trulia, pointed out that tax cuts tend to increase housing demand. “Any time there are tax cuts and home buyers have more money in their pocket, some of that money they are more likely to dedicate to housing.”
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