Tax reform presents homebuyers with blurry ‘blueprint’

With the health care bill back-burnered on Capitol Hill, the focus has shifted to tax reform. Among the key financial matters in play: Homeowners’ prized mortgage interest and property tax deductions.

Though no major version of a reform bill would eliminate the mortgage interest deduction, the House Republicans’ tax legislative “blueprint” would essentially sidestep it by doubling the current standard deduction from $12,600 to $24,000 for joint filers ($12,000 for single filers).

With that large of a standard deduction, the vast majority of homeowners now claiming the write-off would likely stop itemizing. Tax experts estimate that 84 percent of the 45 million taxpayers who would otherwise itemize in 2017 would opt for the enlarged standard deduction under the blueprint instead. The proposal also would repeal most tax deductions and credits — including those for state and local taxes — and would compress today’s seven marginal tax brackets into three: 33 percent, 25 percent and 12 percent.

The blueprint has the backing of House Speaker Paul Ryan and is considered the foundational document for tax reform this year. President Trump floated a somewhat similar plan during the campaign, and the White House is expected to outline a new version in the coming several weeks. Treasury Secretary Steven Mnuchin says tax reform is on a fast track and could be wrapped up by the August congressional recess. That timetable is widely viewed as unrealistic, but some form of tax bill could be passed later this year or in 2018.

So what does all this mean for you if you’re thinking of buying a house or you already own one and itemize deductions including mortgage interest? Is there reason for concern? Homebuilding and real estate advocates are emphatic that the answer is yes. Doubling the size of the standard deduction may sound seductive — it would simplify tax returns for millions of Americans — but could be bad news in disguise for first-time buyers, existing owners and homeownership in general.

That’s because in their view it would dilute the long-standing special status conferred upon homeownership by the federal tax code. There would be no different tax treatment for you whether you owned a home or rented. Plus the tax benefits of ownership that are now baked into home prices would dissipate over time, leading to declines in property values.

In a recent presentation on tax reform, Evan Liddiard, senior tax policy representative for the National Association of Realtors, said the blueprint would “nullify the tax benefits of homeownership.” He offered a hypothetical example: A young couple in Utah with one child and a household income of $61,000 took out a mortgage of $163,000 two years ago. Currently they can deduct $7,160 in mortgage interest, $1,189 in local real estate taxes, $1,304 in mortgage insurance and $2,250 in other state and local taxes. Under the tax code today, their net tax benefits of owning a home came to $1,185 in 2016. Under the blueprint, that would drop to zero. Even taking the enlarged standard deduction, their 2016 tax liability would be $2,940, compared with $2,235 under current law.

Not all tax experts agree with the builders’ and realty advocates’ dark forecasts, however. Joseph Rosenberg, a senior research associate at the independent Tax Policy Center, says he “would be skeptical about any analysis” indicating that the combination of tax code changes proposed in the blueprint would have dramatic effects on homeownership.

Bottom line: Keep an eye on tax reform, but be aware that nothing is going to change overnight — major tax bills always have phasein periods. And given the current deep fissures on Capitol Hill between and within the major parties, a complex piece of legislation loaded with other minefields besides homeowner tax benefits may simply be beyond the abilities of the current crop of lawmakers and this White House.