The tax plan released by the Trump Administration puts the real estate industry at the center of the debate over how to make the country’s tax code simpler, fairer, and better at generating economic growth in the United States. For that reason, it’s important for real estate professionals to dig below the surface to see how the plan could change the tax picture for most homeowners.
The plan calls for reducing the number of tax brackets for individuals, lowering the rates on the remaining brackets, and doubling the standard deduction while eliminating all itemized deductions except those for mortgage interest and charitable contributions.
On the surface, doubling the standard deduction and retaining MID might seem to put more money into the pockets of many middle-income households without compromising the federal government’s historic commitment to home ownership. And in fact it would for some households.
But for most middle-class households who own homes, the new standard deduction won’t be high enough to offset what they would lose on the itemization side. Yes, they would retain the option of taking the deductions for mortgage interest and charitable contributions, but unless these amounts totaled more than the standard deduction, it would not make sense to claim them. Also, they would lose the deductions for real estate taxes, mortgage insurance premiums, state and local taxes, as well as others, such as the medical expense deduction. There are also changes to the treatment of personal and dependent exemptions that will change one’s tax calculation. The net effect on many or even most homeowners would be a loss. In some cases, a big loss.
Take a single female who’s earning $65,000 a year and paying $1,000 a month in rent in Colorado. She decides to make a little higher monthly payment to become a homeowner. She puts 5 percent down on a $265,000 condo, which increases her monthly housing costs to $1,193 (principal and interest). That’s a common scenario for a first-time buyer like her, because while her costs go up, she now has a home of her own and the chance to build equity over time.
But under today’s tax code, her monthly costs actually go down, according to an NAR analysis, because when she claims all of the itemized deductions available to her as a home owner, she ends up with a net tax benefit of over $3,300, or roughly $275 a month, compared to what she would get by taking the standard deduction. When that $275 a month is factored into her monthly housing costs, she’s paying significantly less than she was as a renter.
Under the Administration’s tax plan, that advantage goes away almost entirely because she can only deduct her mortgage interest and charitable contributions Without the option to deduct real estate taxes, state and local taxes, and mortgage insurance premiums, her net tax advantage over taking the standard deduction falls to a little more than $150. Although that’s still a net gain, it’s just a shadow of her current benefits and not nearly enough to bring her monthly housing costs down to what she was paying when renting.
Clearly, the tax picture will differ depending on your situation. For households in higher-tax states, the benefit of itemizing is higher. And for second-home owners, the net tax benefit of itemizing can be substantial. On balance, though, according to different scenarios NAR has run, homeowners are going to come out the losers under the Administration’s tax plan.
Tax experts estimate that 95 percent of homeowners today would find it makes more sense to take the standard deduction rather than itemize under the Administration’s plan. That should be an alarming statistic to real estate professionals, because it means millions of homeowners would be paying more in taxes than they pay today. The tax plan does not preserve homeownership by preserving MID; it devastates homeownership, and it does it in three ways:
1. Removes or largely reduces the tax incentive of owning a home instead of renting one for most people.
2. Discriminatorily raises taxes on homeowners more than on renters.
3. Causes a drop in the value of homes by more than 10 percent.
Separate from the changes the tax plan would make to household’s homeownership calculation are other changes that could affect real estate professionals. These include the proposal to reduce the corporate tax rate from 35 percent to 15 percent and to extend that rate reduction to small businesses and pass-through entities.
NAR Senior Tax Policy Representative Evan Liddiard walks through different scenarios on how the tax plan affects households in a recorded webinar. It’s a good way to dig below the surface to see how the proposed changes could affect real estate. Before taking a stand one way or the other on the tax plan, you’re encouraged to get a sense of how it could affect home owners by watching the presentation.
Watch the recorded webinar.
Access the slides used in the webinar.