Is the mortgage tax deduction doomed?

Castles in the Sand

Have you heard that the Trump administration and Congress are trying to get some level of tax reform accomplished? If you haven’t, you’re either living under a rock or like a lot of Americans, you can’t stand to listen to one more news report. Well, this time you might want to switch from your Netflix escape to real news.

The tax reform plan was finally announced on Nov. 2. There is still a long way for this proposed bill to go before becoming law but there are significant proposals in it that will affect property owners. As predicted, the standard deduction would be doubled, which could make it more advantageous for some homeowners not to itemize their deductions, primarily their mortgage interest, making this popular deduction irrelevant for some homeowners.

Why is this such a big deal? It’s a big deal because depending upon your financial position, the size of your mortgage and a variety of other deductions, it may be beneficial not to itemize your tax return and just take the standard deduction. The argument is that the middle-class homeowner with less valuable property would opt for the standard deduction while the government is still giving a subsidized tax deduction for homeowners with more expensive properties.

In addition, the proposed plan would reduce the mortgage interest cap from $1 million to $500,000 and also cap property tax deductions at $10,000. Neither of these changes will be good for high-end property owners in states where property taxes are high. And as of this writing, the eligibility of mortgage deductions for second homes is vague, as is the one-time capital gains deduction.

According to an analysis by Zillow, about 30 percent of U.S. homes are valuable enough to make it worthwhile to take the mortgage interest deduction and the state and local property taxes. Under the proposed changes, that would drop to 5 percent. This would make the proposed standard deduction a better option for most taxpayers.

Naturally, the real estate industry, led by the National Association of Realtors (NAR), is incensed saying the tax plan “would all but nullify the incentive to purchase a home for most, amounting to a de facto tax increase.” The NAR had PricewaterhouseCoopers conduct a study with the outcome that home prices nationally would likely drop 10 percent in the short term, but most economists expect prices to recover over time.

This would certainly be an adjustment for most Americans who have come to depend on their mortgage and tax deductions. But considering the median home value in the U.S. is just over $200,000, many taxpayers could do better with an increased standard deduction. Home ownership is higher in some countries with no mortgage interest deduction. Canada has a 69 percent home ownership rate and the United Kingdom a 71 percent home ownership rate and neither country has a mortgage interest deduction. The home ownership rate in the U.S. is 64 percent.

Could the proposed caps on mortgage interest and property taxes create a negative incentive to purchase a home on Anna Maria Island and our surrounding waterfront areas? Maybe for some buyers, but people still want what we have and have always shown their willingness to pay the price. In fact, my opinion is that it may have a short-term effect on young people and seniors, who are trying to decide if owning a home or renting is beneficial to their tax bracket. Overall people don’t buy houses because they get a tax deduction they purchase houses to create a home and live a particular lifestyle.

Chances are the legislation will end up looking a lot different in the end than what is currently proposed, and as with all changes made by the government, some will benefit us and some will not.