When President Trump announced his tax plan, I was eager to dig into the numbers to see how his proposal would impact homeownership, especially because NAR came out against it. How useful is the mortgage interest deduction to homeowners, and if taxpayers are bringing home more money, can that really be a bad thing?
- Married taxpayers who make $75,000 or less a year and purchase property worth at or under $400,000 will pay less in taxes under the proposed Trump plan if they take the standard deduction.
- Under the Trump plan, married filers who make $50,000 or less will pay zero federal income tax.
When President Trump announced his tax plan, I was eager to dig into the numbers to see how his proposal would impact homeownership, especially because NAR came out against it.
How useful is the mortgage interest deduction to homeowners, and if taxpayers are bringing home more money, can that really be a bad thing?
The key provisions in Trump’s proposed tax plan that apply to real estate include:
- Reducing the number of tax brackets from seven to four, eliminating income tax for the 73 million households who make less than $50,000 per year.
- Raising the standard deduction to $12,700 for unmarried individuals and $25,400 for those who are married.
- Maintaining the deduction for mortgages and charitable contributions.
- Eliminating deductions for state income taxes.
NAR: “A non-starter for homeowners”
NAR President William E. Brown recently voiced his opposition to President Trump’s proposed tax reform plan.
“Doubling the standard deduction and repealing the state and local tax deduction the plan would effectively nullify the current tax benefits of owning a home for the vast majority of tax filers,” Brown said in a statement. “While the President’s tax proposal released today is well-intentioned, it’s a non-starter for homeowners and real estate professionals who see the benefits of housing and real estate investment at work every day.
Furthermore, according to deputy chief lobbyist at NAR, almost doubling the standard deduction makes it much more attractive to most taxpayers, including homeowners.
“If you’re not itemizing, you’re not using the MID,” explained Gregory, “so ergo you’re taking away the incentive — so ergo you’re making no difference between renting and owning.”
Itemizing vs. standard deduction
Consequently, the mortgage interest rate deductions and the property tax deductions already have no value for them.
Of those who do itemize, only 28 percent claim state income tax or sales tax (21.6 percent claim state income tax and 6.4 percent deduct sales taxes.)
What proportion of homeowner households choose to itemize? Economist Elliot F. Eisenberg, Ph.D., estimates that, at most, 74 percent of homeowners with a mortgage itemize.
A game mostly for the rich?
Would homeowners would be better off in Trump’s scenario than they are under today’s existing tax law? The Motley Fool says that by law, taxpayers can deduct interest paid on their mortgage, but most middle-class taxpayers save little or nothing at all from the mortgage interest tax deduction.
In fact, the mortgage interest tax deduction is more for the benefit of millionaires than it is the average American.
The authors add: “While the mortgage interest tax deduction is touted as one of the best reasons to buy a home, it often provides little help to people who don’t live in a modern-day McMansion. Buyer beware.”
The benefit for first-time buyers
The most difficult challenge for first-time buyers is saving up the down payment. Under the Trump plan, married filers who make $50,000 or less will pay zero federal income tax.
Using the 2016 income tax rate of 25 percent for those earning $37,650 to $91,150, a couple earning $50,000 per year would save $12,500 the first year.
Those tax savings would allow a couple who is renting to save the required three percent down payment for a FHA loan of up to $400,000 in just one year.
Saving enough for a down payment is much more difficult with “after tax” dollars.
What the numbers say: 2 case studies
Assume two couples, one in California and the other in Texas, each purchase a property for $400,000 with 20 percent down.
They both obtain a 30-year fixed rate loan of $320,000 at 4.2 percent interest with monthly payments of $1,565. This will result in a mortgage interest deduction during the first year of $13,336 (approximately $1,111 per month).
It’s important to note that the amount of mortgage interest deduction declines each year the owner stays in the property. For example, in year five, the total interest deduction will be $11,073. That’s a decrease of $2,293 in the homeowner’s mortgage interest deduction.
In contrast, an overall tax rate decrease will remain stable (unless, of course, Congress raises the rate.)
Continuing with the example, both couples report taxable income of $75,000. According to “What-percentage-are-you-calculator-for-2016” from the Wall Street Journal, this places both couples in the 70th percentile for earnings (i.e., 70 percent of the taxpayers make less than they make, and 30 percent make more.)
A side-by-side comparison
California has a relatively low property tax rate (1.2 percent of the sales price with a cap of two percent annually) but a relatively high state income tax.
At $75,000 per year, married California buyers would be in the 15 percent bracket for federal income tax purposes and the 9.3 percent bracket for California State income tax for 2016 ($51,530 to $263,222).
In contrast, Texas has no state income tax but a hefty property tax rate (roughly 2.7 to 3 percent of actual value with a 10 percent annual cap).
Here’s the side-by-side comparison of the deductions for California and Texas on a $400,000 owner-occupied home.
Both numbers are less than Trump’s proposed standard deduction of $25,400.
The bottom line
For married taxpayers who make $75,000 or less a year (70 percent of taxpayers) and purchase a property worth $400,000 or less, they will pay less in taxes under the proposed Trump plan if they take the standard deduction.
How realistic is a $75,000/year household for a homeowner? According to NAR’s most recent profile of home buyers and sellers, in 2016, gross household income for buyers was $88,500. First-time buyers had a median income of $72,000 in 2016, so in some cases, the standard deduction could benefit some first-timers, with the median price of homes in the U.S. at $236,400.
Repeat buyers had a median income of $98,000.
This month, NAR will be discussing tax policy its legislative meetings to include an analysis from PricewaterhouseCoopers that indicates homeowning families with incomes between $50,000-$200,000 would face average tax hikes of $815 in the year after enactment while non-homeowners in the same income range would enjoy average annual tax cuts of $516.
Of course, this entire discussion may be moot — who knows what Congress will ultimately draft, much less even pass.
Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, author and trainer with over 1,000 published articles and two best-selling real estate books. Learn about her training programs at www.RealEstateCoach.com/