A bigger standard deduction may nullify mortgage tax breaks

With the healthcare bill back-burnered on Capitol Hill, the focus has shifted to tax reform. Among the key matters in play for homeowners: deductions for mortgage interest and property taxes.

Though no major reform plan on the table would eliminate the mortgage-interest deduction, House Republicans’ early blueprint would sidestep it by almost doubling the standard deduction from $12,600 to $24,000 for joint filers ($12,000 for single filers).

The proposal also would repeal most tax deductions and credits — including for state and local taxes — and compress today’s seven tax brackets into three: 33 percent, 25 percent and 12 percent.

With that large of a standard deduction, the vast majority of homeowners now claiming the write-off would likely stop itemizing.

So what does all this mean if you’re thinking of buying a house or you already own one? Home-building and real-estate advocates are emphatic that there is reason for concern.

In their view, the change would dilute the long-standing special status conferred upon homeownership by the federal tax code. There would be no different tax treatment regardless of whether you owned a home or rented.

Jerry Howard, CEO of the National Association of Home Builders, said, “From the inception of the tax code, our public policy has been consistently in favor of incenting people to buy homes.”

To water that down, he believes, would be a social and economic mistake.

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 $163,000 mortgage two years ago. 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. Today, their net tax benefit of owning a home comes to $1,185. The blueprint drops that to zero. Even taking the enlarged standard deduction, their tax liability would be $2,940, compared with $2,235 under current law.

But Joseph Rosenberg, a senior research associate at the independent Tax Policy Center, says he “would be skeptical about any analysis” indicating that the blueprint plan would have dramatic effects on homeownership.

“The most plausible effect,” he said, might be on home values, where studies have concluded that tax benefits have been “capitalized” into prices over time, though by how much is unclear.

The White House is expected to outline its own tax reform plan in the next few weeks. Given the deep fissures on Capitol Hill between and within the major parties, a complex piece of legislation — where homeowner tax benefits are just one of the minefields — may be beyond the abilities of the current crop of lawmakers and this White House.