Lower mortgage interest tax break: “All-out assault” or glancing blow?
By Jeff Ostrowski
If there’s one thing that’s certain to mobilize the nation’s largest trade group, it’s any talk of reining in tax breaks for homeowners with mortgages.
House Republicans on Thursday passed a tax plan that caps at $500,000 the amount of debt eligible for the mortgage interest deduction. The National Association of Realtors responded by revving its lobbying engine into overdrive — even though the consensus among housing experts is that the move would deliver only a glancing blow to the real estate market.
NAR President Elizabeth Mendenhall, a Realtor in Missouri, on Wednesday called the tax proposal “an all-out assault on homeowners and homeownership.”
State and local Realtor associations are equally disturbed. The Florida Realtors says the House tax proposal would send Florida home values plummeting by 13 percent and would remove crucial incentives to homeownership.
“We do not want to become a culture of renters,” Florida Realtors President Maria Wells said Monday during a news conference in West Palm Beach. “We want to become a culture of homeowners.”
Few independent observers share that sense of alarm. Cutting the cap on the mortgage interest deduction to $500,000 from the current $1 million would reduce the tax subsidy for affluent homeowners, but it wouldn’t affect most borrowers in the United States, Florida or Palm Beach County.
“You’re not going to go back to renting,” said Greg McBride, senior financial analyst at Bankrate.com in Palm Beach Gardens. “It’s not something that’s going to impact the rate of homeowenrship.”
Despite its reputation as an untouchable part of the tax code, the mortgage interest deduction has grown less valuable as a tax break for middle-class homeowners, many observers say. While mortgages of more than $500,000 are common in San Francisco, New York City and other high-cost housing markets, they’re relatively rare in Palm Beach County.
The median price of houses and condos sold in Palm Beach County from July through September was $245,000, according to the National Association of Home Builders/Wells Fargo housing affordability index. That means fully half of properties sold during the third quarter fetched less than half the amount of the House’s proposed limit.
Nationally, the median price of single-family homes was $254,000 during the third quarter, according to NAR.
That’s why Rick Palacios Jr., director of research at John Burns Real Estate Consulting, calls the mortgage interest deduction a “non-issue” for most homeowners.
“It’s really not that important,” Palacios said. “A small fraction of the market uses it.”
Home Depot, which makes its money by selling products to homeowners and their contractors, agrees.
“We don’t see much of an impact,” Carol Tome, the retailer’s chief financial officer, told Bloomberg News Tuesday. “There is no real empirical evidence that suggests mortgage-interest deductibility is at all correlated to home ownership.”
Even some Realtors say they can live with reining in the mortgage interest deduction.
“I don’t think it’s good, but it’s not the end of the world,” said Victor DeFrisco, owner of Exit Realty Premier Properties in suburban Lake Worth. “If you need a place to live, you’re going to buy a house. You’re not going to say, ‘I’m not going to buy a house because I can’t deduct the interest any more.’ And the people who are buying $500,000 or $750,000 houses don’t care about the few crappy dollars they get back on their taxes.”
Proponents of the House proposal argue that less generous tax breaks for homeowners would be offset by a near doubling of the standard deduction, to $24,400 for married couples in 2018.
The value of the mortgage interest deduction has been undercut in recent years by the combination of low mortgage rates and rising standard deductions. The standard deduction for 2017 is $12,700 for a married couple, an amount that exceeds the mortgage interest paid by most homeowners.
Say a homeowner borrowed $300,000 in late 2016 by taking a 30-year loan at an interest rate of 4 percent. The borrower would pay interest of $11,904 in 2017 — not enough to warrant itemizing deductions.
The mortgage interest deduction has been part of the U.S. tax code since 1913, and NAR — which boasts 1.3 million members — fiercely defends the tax break.
“It’s a very popular deduction. Literally, it’s hitting home, so there’s a lot of fear that goes around it,” said Wayne Winegarden, senior fellow at the Pacific Research Institute in San Francisco. “In reality, if you’re talking about a tax benefit for the rich, it’s clearly skewed toward the upper-income taxpayers.”
While Winegarden said cutting the mortgage interest deduction to $500,000 wouldn’t affect most middle-class homeowners, it could set the stage for a complete repeal of the break. And while mortgage rates have been at historic lows for years, a spike in interest rates would make the mortgage interest deduction relevant again to a broader swath of homeowners.
For now, the biggest benefits of the mortgage interest deduction accrue to the wealthiest homeowners. If Congress were to halve the amount of the mortgage interest deduction, affluent buyers might shift their focus to less expensive homes, McBride said.
“For those to whom it matters, it matters a lot,” McBride said. “As a result, it will continue be a contentious issue.”
Tellingly, the Senate’s tax proposal keeps the $1 million limit in place. The House proposal to cut the limit to $500,000 would apply only to new loans, which could spur homeowners with large mortgages to stay in their homes rather than move and lose a tax break.
The Republican tax proposals also would end write-offs for property taxes and boost capital-gains taxes on home sales.
After Thursday’s House vote, Democrats and Realtors continued an all-out blitz against the House tax proposal.
“The Republicans’ tax scam robs the middle-class to give huge tax cuts to corporations and the super wealthy,” said U.S. Rep. Lois Frankel, D-West Palm Beach.