For more than a century American tax policy has recognized the value of homeownership to American middle-class wealth creation, strong and stable communities, and as a driver of our nation's economy. Homeownership is not a special interest, it is our common interest, yet through misplaced priorities in tax reform, Congress would place the American Dream further out of reach for millions of Americans at a time when our homeownership rate is at a 50 year low. In short, the Tax Cut and Jobs Act is a serious step in the wrong direction.
The Tax Cuts and Jobs Act, the Senate Tax Reform Plan
The Senate tax reform bill, like its companion that passed in the House of Representatives, is a direct threat to homeowners and consumers. Not only will millions of homeowners not benefit from the proposal, many will get a tax increase. Additionally, homeowners could lose substantial equity from the more than 10 percent drop in home values likely to result if the bill is enacted.
The legislation passed by the Senate includes changes to the exemption for gains from the sale of a primary residence, elimination of the deduction for state and local income or sales taxes, a cap on the deduction for real property taxes, elimination of the deduction of interest on home equity loans (unless the proceeds of such loans are used to substantially improve the residence), restrictions on the deduction for moving expenses to only active duty military, and restrictions on the deduction for personal casualty losses to Presidentially declared disasters. All this from a bill that is supposed to improve the current tax system.
H.R. 1, The Tax Cut and Jobs Act
As passed by the House and the Senate, H.R. 1 (link is external)would eviscerate the current-law tax incentives for purchasing and owning a home for all but a small percentage of Americans (6 percent, according to the Joint Committee on Taxation).
By nearly doubling the standard deduction while eliminating most itemized deductions, the bill would destroy or at least cripple the incentive value of the mortgage interest deduction (MID) for the great majority of current and prospective homebuyers, and sap the incentive value of the property tax deduction for millions more.
The direct result of these changes would be a plunge in home values across America in excess of 10 percent, and likely more in higher cost areas. Provisions in the House bill would limit the deductibility of interest on new mortgage loans to $500,000 (for those few who could still itemize) and eliminate the deduction altogether for second homes. Both bills also restrict the use of the exclusion of gain from the sale of a principal residence by increasing the number of years the homeowner must live in the residence from the current law's two of the past five years to five of the past eight years. The House bill goes beyond this by limiting the exclusion to those with incomes of less than $250,000 (for singles filers) and $500,000 for joint returns (subject to a phaseout). And both bills also limit the deduction for real property taxes to $10,000, again for those few homeowners who will still be itemizing their deductions. Perhaps even worse in the long run, many of these changes are not indexed for inflation, increasing the pain on more and more homeowners over time.
NAR's research indicates that the average first-time homebuyer makes a down payment of less than 10 percent, meaning that millions of owners of recently-purchased homes would go "under water" on their mortgages, and they would owe more than the homes are worth. This, of course, could lead to devastating results for families that must sell, as well as damage neighborhoods, communities, and the economy itself.
The hard-won equity of millions more homeowners could be ravaged as well. Parents planning to use the value of their homes to help finance the higher education costs of children could find their resources shot, and baby-boomer homeowners nearing retirement who hoped to use their home's equity to pay for a portion of their retirement may have to delay or revise their plans.
The bottom line is that for tax purposes, owning a home would be treated the same as renting one for the great majority of Americans. This would reverse more than a century of pro-homeownership tax policy and result in untold negative economic and social implications.
While this tax reform legislation is being promoted as a tax cut for middle-income families, the reality is that millions of middle-class homeowners would immediately face tax increases, while those who see a tax cut will see significantly less tax relief if they own a home than if they are a renter.
Promoters of the House bill point to a "typical family of four" making $59,000 a year as an example of middle-class tax relief delivered by the bill. The family is renting a home, based on the facts presented, and is to receive a tax cut of $1,182 the first year after enactment. But if the family owned a home with a typical mortgage for their income level, the tax savings would be 36 percent less.
This may seem a minor difference to some, but the difference grows quickly as income rises. Consider again this same "typical family of four," but this time assign them a median family income of $73,000 rather than the median household income of $59,000 as per the example put forward by the House Ways and Means Committee. In this case, the renting family receives a tax cut of $1,478 under the bill, but the home-owning family would get a refund less than half what the same family would receive as renters.
Finally, looking at this same family, but with an income of $120,000, as renters, they would receive a tax cut under the House-passed bill of $3,408. However, as homeowners with a typical mortgage in a typical average-cost state, they would have a tax increase of $226. This hidden "homeowners penalty" would be an astounding $3,634. Further, the House version of the Tax Cuts and Jobs Act not only eliminates the current tax advantages of homeownership, and thus discourages homeownership for many, it would actually encourage renting by allowing investors in residential property to continue to be eligible for full deductions of all interest and property taxes.
To make things worse, the relatively small tax cuts that many middle-class homeowners receive from both the House and Senate bills would vanish after just a few years. Based on the Congressional Budget Office forecast of inflation, income growth, and 10-year Treasury rates, coupled with the expiration of many of the provisions, most middle class families would see their modest tax cuts transform to tax increases under the plan compared to current law after five or eight years. NAR does not believe vanishing tax cuts, coupled with vanishing home equity, is a formula for growing our economy.
Homeowners currently pay 83 percent of all Federal income taxes. This percentage is likely to increase significantly under the Tax Cuts and Jobs Act. At the same time, long standing federal tax policy that recognizes the importance of homeownership to our nation would be eliminated for all but a fortunate few. NAR cannot support these changes because REALTORS® know that tax reform can be better than this. A tax reform bill that is projected to add $1.5 trillion to our national debt should produce very few, if any, losers. Unfortunately, it appears America's homeowners and owner-occupied real estate in general are by far the largest losers in this legislation.
Thanks to our members’ engagement, REALTORS have helped positively influence tax reform in some key areas. For example, both the House and Senate have agreed to maintain deductibility of state and local property taxes up to $10,000, and to maintain Section 1031 tax-deferred exchanges in their present form for real estate investments.
BUT OUR WORK IS NOT DONE. REALTORS have an opportunity to influence Congress to help make the tax reform bill more favorable to homeowners and consumers. Now that both the House and Senate have passed The Tax Cut and Jobs Act, a Conference Committee will begin to address the differences between the two bills. Important improvements in the legislation are possible by encouraging Congress maintain the current law for the mortgage interest deduction and capital gains. Congress can also address the State and Local Tax Deductibility issue by expanding the provision to include income taxes, raising the cap and indexing the cap to inflation. These changes and retaining the current law makes the bill more favorable to homeownership.