Tax reform bills don’t support homeownership

The legislative proposals for tax reform passed by the House Ways and Means Committee and the new Senate plan released last week include some sweeping changes to the tax benefits that homeowners have come to depend on. According to Kentucky REALTORS® (KYR) and the National Association of REALTORS®, the bills are a direct threat to consumers, homeowners and businesses, as they represent a tax increase on middle-class homeowners.

In addition to millions of homeowners not benefitting from either of the proposals, many will get a tax increase that will average $815 for middle-class homeowners. Additionally, homeowners could lose substantial equity from the more than 10% drop in home values predicted by economists if either of the bills are enacted.

KYR believes in the promise of lower tax rates, but these bills are not as good a deal as the one middle-class homeowners get under current law. Tax hikes and falling home prices are a one-two punch that homeowners must absorb, and at a time when the housing market is stable and providing a boost to the economy.

“We have always said that tax reform – a worthy endeavor – should first do no harm to homeowners. This tax framework misses that goal,” said Mike Becker, president of Kentucky REALTORS®. “These proposals recommend a backdoor elimination of the mortgage interest deduction (MID) for all but the top 5 percent who would still itemize their deductions in addition to losing many other important benefits afforded to homeowners.”

The pieces of legislation double the standard deduction, while repealing nearly all itemized deductions. The House bill, however, goes even further by capping the mortgage interest deduction at $500,000 for newly purchased homes and eliminates it altogether for second homes, which could negatively affect home sales around Kentucky’s lake and river regions where consumers typically make those purchases. The Senate bill completely eliminates the deductions for property taxes even though it doesn’t lower the cap on the MID.

Both bills eliminate state and local income or sales tax deductions while at the same time putting new restrictions on the capital gains exemption homeowners utilize today when they sell their home. The bills would require homeowners to live in their home for 5 of 8 years before a sale to qualify for the exemption, versus just 2 of the previous 5 years today. This could create a hardship for homeowners who have to move inside that five-year window like members of the military who have turnarounds in as little as 3 years. The exemption is also vital to allowing homeowners to use their equity to pay for retirement and other long-term needs.

In addition, the bills eliminate many other real estate-related benefits, including the deduction for moving expenses, the deduction on interest on student loans (House version), the deduction for medical expenses (House version) – even for the elderly and the deduction for personal casualty losses, such as from hurricanes or wildfires.

Currently, America’s homeownership rate hovers near the 50-year low at 63.9%. For many middle-class families, buying a home is the single largest investment they will ever make. In fact, the average net worth of a homeowner is 45 times that of a renter. By eliminating or nullifying the incentive for homeownership, however, KYR and REALTORS® across the state are concerned that homeownership’s wealth-building potential could be pushed out of reach.

“All in all, both bills not only represent a tax increase on millions of middle-class homeowners, but at the same time, create a lost incentive to purchase a home which could cause home values to fall,” said Becker. “Plummeting home values are a poor housewarming gift for recent homebuyers and a tremendous blow to older Americans who depend on their home to provide a nest egg for retirement. We are pushing for sensible reform that will provide a win for American families by promoting lower rates and comprehensive reform that doesn’t single out homeowners for a tax hike, while also preserving important investment incentives.”

When all the changes included in the latest tax reform proposals are totaled, millions of middle class homeowners will see little benefit, while others will actually see a tax increase. All of this is being placed on the backs of middle class homeowners, while their children and grandchildren are asked to take on an additional $1.5 trillion to the deficit. Tax reform is important, but the final product should reflect the tremendous value that homeownership offers the community.

In summary,

  • If you are a seller: You might not be able to exempt your capital gains when you sell.
  • If you are a buyer: You might not be able to deduct your mortgage interest on your new home and you can’t deduct your moving expenses.
  • If you are a homeowner: You might not be able to deduct any of your property taxes.
  • If you are a second homeowner: You may not be able to deduct your mortgage interest.
  • If you are a REALTOR®: Homebuyers are losing incentives to buy a home, and homeowners have lots of incentives to stay put to keep their full mortgage interest tax deduction and to wait out the exemption for their capital gains.

Tax reform fact sheet – see how the two versions stack up for homeownership