The Mortgage Interest Deduction Fight Continues – 2018

Whenever a lawmaker proposes tax reform, the real estate market might not be the first thing on their mind. But the National Association of Realtors has taken a firm stance on a certain piece of the currently proposed changes to standard versus itemized deductions. Specifically, they’re worried about the Mortgage Interest Deduction.

Does this tax break actually affect home ownership rates? How does the ability to deduct mortgage interest really impact those who buy and own homes? Your local Portland real estate team dives in for a closer look at this tax policy and what it means to you.

What is the Mortgage Interest Deduction?

For first-time home buyers, finding out about this long-established piece of the US Tax Code is often a pleasant surprise. It works like this: When you pay interest on a mortgage, that amount can be deducted from the amount of income you claim on your federal taxes. Hence, the Mortgage Interest Deduction. But, the mortgage interest can only be deducted if you don’t claim the standard deduction, and choose to itemize deductions instead.

This deduction has the effect of subsidizing monthly mortgage payments for the 20% of taxpayers who itemize deductions. However, it’s not clear whether those getting a little help in the form of this tax break are actually the ones who need it. As a result, over the years, this deduction has come under attack.

The Mortgage Interest Deduction, or MID, dates back to the creation of the US Income Tax in 1913. In fact, it was actually created before mortgage interest existed for most Americans! The tax code was written to exclude all interest from being taxable. It was a break only for the richest Americans; at the time, everyone else bought homes and land outright because lending to the working class was almost unheard of.

Then came federally insured home mortgages in the 1930s, and soon a large portion of the population was enjoying the fact that they didn’t have to pay taxes on income that went toward their mortgage interest. It’s difficult to pinpoint all of the reasons why people buy homes (there are many), but certainly, having a lower tax bill doesn’t discourage the practice!

Tax Policy Changes Impacting the MID

Over the years, the suggestion to remove the Mortgage Interest Deduction from the tax code has come up many times, but it’s never a very popular policy proposal. Although most taxpayers seem to take the standard deduction, it’s hard to touch the MID because it does reward people for buying homes, and most people see a healthy real estate market as essential to the overall economy.

The Trump tax reform bill currently being proposed doesn’t touch the MID, but the National Association of Realtors and other groups are not happy with the proposed changes. Why? They double the standard deduction for singles and couples, meaning that 20% who do itemize deductions – including mortgage interest – would no longer see a tax advantage in doing so. Fewer people would benefit from homeownership, at least tax-wise.

Will the housing market suffer without the MID?

An article published October 2nd in Fortune Magazine claims that reducing the power of the MID will have a negative impact on homeownership rates. On the other hand, because it doesn’t touch a separate tax deduction for interest paid on home mortgages for rental properties, we could start seeing more investment in rental properties under this tax plan, according to Fortune.
In response to critics worried about the housing market, President Donald Trump’s chief economic advisor, Gary Cohn, has said that, “People don’t buy homes because of the mortgage deduction.”

As a real estate agent, I most often hear that people want to buy a home because it’s a good investment (especially if they take advantage of the cool-season real estate market in Portland), it makes sense for them financially to pay off a home instead of paying rent, and they want that vital piece of the American dream: Homeownership. Tax deductions may be on the list, but it’s not nearly as enticing as these other reasons.

On the other hand, the data does show that Oregon benefits more than many other US states from the MID. In a study by the Tax Foundation in 2011, the mortgage interest deduction taken in Oregon averaged $2,281 dollars. That put us at #11 out of 50 states.

With a strong housing market, especially in the Portland metro area, it’s unlikely that this tax change will lead to any kind of slowdown that wasn’t already in the works. And, it’s important to keep in mind that instead of getting that mortgage-interest $2,000 plus change as part of their itemized deduction, more Oregonians will likely take the standard deduction and end up saving on their taxes in the long run. Saving on taxes means they’re more likely to be able to afford home ownership. We could actually see home buying activity go up, and those who already own a home would be less likely to default on their mortgages.

Other Tax Incentives for Buying a Home

• Whether you buy a home in Portland, Oregon or somewhere else, there are plenty of tax-related benefits outside of the MID.
• Property taxes can be deducted from federal tax. For those taxpayers itemizing deductions — which may be fewer if the Trump tax plan passes — property taxes paid to local municipalities are also deductible.
• Profits from home sale are non-taxable (to a limit). In real estate markets where property values are going up over time (most US markets but especially Portland), homeowners usually profit when they sell their home. There are a couple of catches, though, including how long you live in the home. If the capital gains (the amount of money you make by selling the home for more than you bought it) are less than $250,000 ($500,000 for joint filers), you don’t have to pay taxes on any of that income.

(Always consult a tax professional before making a tax related decision.)

Jan. 2018 update to this article: Read our final analysis on how the completed 2018 Tax Reform Bill will affect the real estate market and your available mortgage interest deductions.

Even if these tax benefits don’t apply to you, there are plenty of great reasons to buy a home in Portland. Contact your local Portland real estate agent to find out more!