What Home Sellers Need to Know About President Trump’s Tax Proposal

Touted as “the biggest tax cut and the largest tax reform in the history of this country” by Treasury Secretary Steven Mnuchin, President Trump’s new tax proposal calls for a larger standard deduction that would affect the number of homeowners who take advantage of the mortgage interest deduction when they file their federal taxes.

For many homeowners, the newly proposed standard deduction ($12,700 for single filers and $24,000 for joint filers) would be more than their itemized deductions—of which mortgage interest is one—that they potentially claim on Schedule A of their federal tax returns. Only those homeowners who pay the most interest on their home loans—the ones with the biggest mortgages—would still be able to deduct their mortgage interest.

In addition, the new tax plan may preclude homeowners from also deducting their state, local, and real estate taxes, including property taxes. This will especially affect homeowners in the Northeast and West Coast, who have some of the highest tax rates.

Impact on the Housing Market

So how could President Trump’s plan affect the housing market, particularly those who plan to sell their homes? According to National Association of Realtors® President William Brown, it could potentially be detrimental:

“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 home buyers will see that dream pushed further out of reach.”

According to Federal Reserve economist David E. Rappoport, if the mortgage interest deduction can no longer be utilized by the majority of homeowners, housing prices would drop an average of 6.9 percent. That’s significantly smaller than the double-digit decline experienced after the 2006 housing bubble burst, but it would still equate to a loss of nearly $17,000 on a $240,000 home.

The biggest effect on home prices (and those selling their homes) will be with moderately priced homes and middle-income homeowners. According to the Tax Policy Center, only around 20% of taxpayers claim the mortgage interest deduction, and the average is a little more than $2,000. Although these homeowners may experience a small loss in home equity, the long-term housing demand figures to push prices back up over time.

With all this being said, 72% of Americans support government tax incentives that encourage homeownership. Yet, there are many real estate and construction industry lobbyists who plan to fight President Trump’s tax proposal during the coming months. In other words, the proposal has a long road ahead of it in Congress, and it will likely be altered significantly prior to being signed into law. At this point, we’re more likely to see another Fed rate increase before we see this bill become law. Still, it’s important to watch if you’re a homeowner or if you’re considering becoming one.

At Bay National Title Company, we’ll continue to monitor how the new tax proposal could affect you and keep you informed about what transpires. We consider an informed customer the best kind. If you’re looking for a title company that places the customer first and offers a better closing experience, contact us today.