Tax plan would al­ter de­duc­tion

Mea­sure could erode in­cen­tive to buy a costlier house

The Dallas Morning News - - Business - Josh Boak, The As­so­ci­ated Press

Un­der Pres­i­dent Don­ald Trump’s tax pro­posal, some Amer­i­cans would likely be steered away from de­duct­ing the in­ter­est they pay on their mort­gages from their tax­able in­come.

WASHINGTON — Each year, tax­pay­ers sub­si­dize Amer­ica’s home­own­ers by roughly $70 bil­lion, with the ben­e­fits flow­ing dis­pro­por­tion­ately to coastal ar­eas with high in­comes and pricey homes, from New York and Washington to Los Angeles and San Fran­cisco.

The sub­sidy for home­own­ers comes in the form of a de­duc­tion from their taxes for the in­ter­est they pay on their mort­gages. Af­flu­ent New York­ers, for ex­am­ple, would have saved an av­er­age of $3,694 in 2015, ac­cord­ing to an anal­y­sis of IRS data re­leased Wednesday by the real es­tate com­pany Apart­ment List. In metro Los Angeles, the de­duc­tion was worth an av­er­age of $4,568; in San Fran­cisco, still more: $5,500.

But un­der Pres­i­dent Don­ald Trump’s tax pro­posal, some Amer­i­cans would prob­a­bly be steered away from this tax break. That’s be­cause Trump’s plan would nearly dou­ble the stan­dard de­duc­tion, which tax­pay­ers can take if they don’t item­ize de­duc­tions. The higher stan­dard de­duc­tion could ex­ceed the sav­ings many re­ceive now from item­iz­ing their ex­penses for hous­ing, state and lo­cal taxes and re­lated costs.

But the Trump plan would also elim­i­nate many ex­ist­ing item­ized de­duc­tions, in­clud­ing those for state and lo­cal taxes, so that some peo­ple who now item­ize might end up pay­ing more.

The pres­i­dent’s pro­posal would es­sen­tially marginal­ize the use of the mort­gage in­ter­est de­duc­tion, which is the gov­ern­ment’s pri­mary form of di­rect hous­ing as­sis­tance: It dis­trib­utes three times as much money this way as it does in the form of vouch­ers for im­pov­er­ished ren­ters.

Real­tors wary

Trump ad­min­is­tra­tion of­fi­cials say their tax plan is de­signed to ben­e­fit the mid­dle class. Yet it’s not clear from the scant de­tails of the frame­work re­leased so far how many fam­i­lies would en­joy lower tax bills and how many would face higher bills.

Al­though the Trump out­line would pre­serve the mort­gage in­ter­est de­duc­tion, it is con­fronting re­sis­tance from the real es­tate in­dus­try be­cause it would prob­a­bly re­duce the num­ber of peo­ple seek­ing the de­duc­tion.

Es­ti­mates by the real es­tate firm Zil­low sug­gest that the de­duc­tion is of ben­e­fit now to peo­ple buy­ing homes worth at least $305,000. But un­der the Trump plan, only those with homes worth $801,000 or more would find it ad­van­ta­geous to take the de­duc­tion.

This has led the in­dus­try to push back against the plan.

“We don’t want to go back­wards — we don’t want to lose what in­cen­tives that we have,” said Jamie Gre­gory, deputy chief lob­by­ist for the National As­so­ci­a­tion of Real­tors.

The National As­so­ci­a­tion of Home­builders says it might be open to elim­i­nat­ing the mort­gage in­ter­est de­duc­tion so long as home­own­er­ship was pro­tected else­where in the tax code through the use of a pos­si­bly more gen­er­ous tax credit.

But there are no signs that the idea of a credit has gained trac­tion within Con­gress or the White House.

Who ben­e­fits?

Trump pro­claimed in June that his tax plan would ac­cel­er­ate eco­nomic growth to en­sure that “hard-work­ing Amer­i­cans en­joy a fair chance at be­com­ing home­own­ers.”

Chris Salviati, a hous­ing econ­o­mist at Apart­ment List, noted that the main ef­fect of the mort­gage in­ter­est de­duc­tion is to en­able peo­ple to spend more on homes rather than to in­crease own­er­ship, which is near a 51-year low.

Though the ben­e­fits of tax breaks for hous­ing skew most to­ward peo­ple in the top 20 per­cent of in­come, the breaks also tend to help mid­dle-class Amer­i­cans. Roughly half the house­holds in metro Washington with in­comes be­tween $74,000 and $112,000 — a group that could be con­sid­ered mid­dle class in that area — took the mort­gage in­ter­est de­duc­tion in 2015 and saved an av­er­age of $2,530. The av­er­age home price in the Washington area is just be­low $400,000.

Ar­eas with lower home val­ues tend to ben­e­fit less from the de­duc­tion. In a sim­i­lar group of mid­dle-in­come house­holds in Indianapolis — where the av­er­age home cost around $140,000 — just 19 per­cent of them took the de­duc­tion, and they saved only $655 on av­er­age in 2015. The sav­ings for mid­dle-in­come house­holds were just $691 in Cleve­land, $666 in Lit­tle Rock and $673 in Mem­phis, Tenn.

Yet the Apart­ment List anal­y­sis also in­di­cates that Trump’s tax out­line would do lit­tle for lower-in­come house­holds. A mere 11 per­cent of house­holds with in­come be­low 80 per­cent of the national me­dian ben­e­fit from the mort­gage in­ter­est de­duc­tion or rental hous­ing vouch­ers.

Justin Sul­li­van/Getty Im­ages

Pres­i­dent Don­ald Trump says his tax over­haul would ac­cel­er­ate eco­nomic growth to en­sure that “hard-work­ing Amer­i­cans en­joy a fair chance at be­com­ing home­own­ers.” But the prospect of mak­ing the mort­gage in­ter­est de­duc­tion worth­while to fewer peo­ple has Real­tors con­cerned.

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