The future of the mortgage interest tax deduction is unclear. With ongoing discussions about tax reform in Washington, it is important to keep up to date on what the potential changes may entail. Could it discourage homeownership? What changes are being suggested and how could it affect the real estate industry, lenders, and homeowners?
Potential Changes Could Make a Real Impact
Right now, the cap on the mortgage interest deduction for homeowners on their tax returns is one million dollars combined for a primary residence and second home. This itemized deduction is a significant part (and often the largest deduction) of a federal tax return. In addition, you can deduct up to $100,000 in interest for home-equity loans, unless you are paying the Alternative Minimum Tax.
The House and the Senate are in the midst of a number of discussions about tax reform, and here is one change that lawmakers are considering: lowering the $1 million loan cap to $500,000. This could increase revenue for the federal government somewhere between $100 billion and $300 billion over ten years, and would disproportionately affect higher-income earners.
It is important for industry professionals to know that the proposals also include the elimination of the ability of income tax filers to deduct local and state taxes, including property taxes. This can really make a difference for potential home buyers in the middle-income bracket too.
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Mortgage Lenders and Real Estate Professionals: Pay Attention
Professionals in the mortgage and home-selling business have a history of being in favor of the MITD — and rightly so. If the MITD does receive a large cut in the allowable deduction, it is a de facto tax increase on current and future homeowners. This creates a burden on buyers, making it harder for them to buy, and keep a home. The real estate marketplace could suffer a substantial blow.
An alternative to the changes in the mortgage interest deduction that is also making the rounds in tax reform discussions is a doubling of the standard deduction. If this happens, it could potentially lower the use of the MITD by up to 90% by middle-income Americans. The offset to this would more than likely be a repealing of the local and state tax deductions. Housing demands and home values would be negatively impacted.
The potential for significant effect on the purchase of homes is real. With fiscal conservatives in favor of the reduction, and perhaps other leaders in the legislature, it is important to be concerned. As work moves forward to address tax reform, one thing is certain — there will be plenty of voices that will continue to stand up for the industry and the MITD, including the National Association of Realtors.
Pay attention to ongoing conversations and keep updated on the latest news affecting the industry, but know this is no time to panic. Tax reform is a complicated and hefty process, and there are a lot of uncertainties. Continuing to move forward with your business plans, while keeping an eye on potential changes, provides security and confidence. Your best practices are your best friends.