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Tax Reform- Good for Homeownership?

posted by Heather Fegan | Nov 15, 2016

By: Jamie Rix

The topic of tax reform can often be full of tedious information, however, proposed changes could potentially negatively affect homeownership and the REALTOR® profession.

In the November 2016 Federal Issues Update at the National Association of REALTORS® (NAR) convention, NAR Senior Policy Representative, Vijay Yadlapati compared three proposed tax reform plans that do not necessarily keep their promise to leave the mortgage interest deduction (MID) unchanged. Under these plans, the benefits of the MID would actually be drastically cut for most tax payers.

Tax plan #1: Representative Dave Camp’s (R-MI) Tax Reform Act of 2014

“The MID modification would preserve a substantial tax benefit for homeownership without affecting most taxpayers . . . And for those taxpayers who would continue to itemize, no existing mortgage would be affected by this provision, and 95 percent of future mortgages are also expected to be unaffected. Based on data, a family of four could have an extra $1,300 per year in its pocket from the combination of tax modifications and lower tax rates.”  

Tax Reform Act of 2014 Discussion Draft Section-by-Section Summary, p. 19.

Tax plan #2: Representative Ron Wyden’s (D-OR) Tax Reform Plan of 2011

“Wyden-Coats retains many of the most commonly claimed individual tax credits and deductions, including the MID and charitable contributions, credits for children and earned income.”

Summary of The Bipartisan Tax Fairness and Simplification Act of 2011.

Tax plan #3: Congressional House Republican Tax Reform ‘Blueprint’ of 2016

“The ‘Blueprint’ will preserve a type of MID for homeowners. . . For those taxpayers who continue to itemize deductions, no existing mortgage will be affected by any changes in the tax code.  Similarly, no changes will affect re-financings of existing mortgages. But just as importantly, because of the other provisions included in the tax system, far fewer taxpayers will choose to itemize deductions, with the vast majority of taxpayers finding they are better off by taking advantage of the larger, standard deduction instead.”

A Better Way: A Pro-Growth Tax Code For All Americans.

These cases do not repeal the MID, in fact, the Wyden plan and Blueprint do not even reference the MID at all. However, these modifications to the MID and tax proposals would not only limit or eliminate the ability to claim the MID, but would also largely invalidate the tax benefits of homeownership as explained further.

The Devil's in the Details

Homeownership tax benefits would vanish under these tax reform plans, and ultimately encourage people to rent rather than buy. Why? The answer is simple; large increases in standard deduction and repeal of state and local tax deduction (Camp plan and Blueprint).

The standard deduction would still be available for everyone. It ensures that all taxpayers have some income not subjected to federal income tax. For 2016, the standard deduction is $6,300 for singles and $12,600 for joint returns.

What happens if standard deduction increases?

  • If standard deduction increases then itemized deductions become less relevant and fewer people would likely claim them.

  • The effect becomes complicated if one or more of the major itemized deductions is repealed (such as deduction for state and local taxes).

  • This results in a simpler tax system, but one where tax incentives of home ownership could disappear even while taxes are not even being reduced.

Ultimately, these plans create little tax advantage for buying over renting. If tax reform offers much larger standard deduction, combined with repeal of state and local tax deduction, it is likely to gut the tax benefits of homeownership, even if it does not repeal or even modify the MID itself. The standard deduction is almost double and the repealing of state and local tax deduction under the Camp Plan and Blueprint plan. The Wyden Plan triples the deduction.

It is absolutely critical to continue to support candidates that have the best interest for REALTORS® and homeownership by identifying legislation that could positively or negatively affect our profession.