- Housing-industry trade organizations immediately condemned House Republicans' tax bill when it passed in mid-November.
- Senate Republicans' version passed over the weekend. Unlike the House's bill, it doesn't halve the mortgage interest deduction, but it could still remove tax benefits for homeowners.
- The Senate's bill raises the standard deduction, meaning households would be less likely to exceed that threshold and choose to itemize their mortgage interest.
- Both versions could end up weakening home prices.
The GOP tax bill should keep homeowners on alert.
Early on Saturday, Senate Republicans passed their version of the bill, called the Tax Cuts and Jobs Act, pushing it closer to President Donald Trump's desk for signing. The bill's differences from House Republicans' version, passed in mid-November, will now be negotiated in a conference committee.
The key difference for homeowners is in the amount of mortgage interest they can deduct from taxes.
The House's version, which housing-industry trade organizations swiftly condemned, halves the mortgage interest deduction, to the first $500,000 of a loan.
The Senate's version maintains the status quo at $1 million but removes the current deduction for interest paid on home equity debt. It also increases the standard deduction for all income subject to taxation to $12,000 for individuals (from $6,350) and $24,000 for married couples (from $12,700).
This means that, like the House's bill, the Senate's version removes some incentives for homeownership, said Danielle Hale, the chief economist at Realtor.com.
"Even though the mortgage interest deduction is being kept for mortgages up to $1 million [under the Senate plan], the higher standard deduction still makes it less likely that households will exceed that standard deduction threshold and choose to itemize," Hale said.
In other words, the higher standard deduction may eliminate a key tax benefit of homeownership. Taxpayers can generally save money if their itemized deductions exceed the standard deduction.
The standard deduction is indexed to inflation, while the housing provisions are not designed to be adjusted for overall price increases. If inflation picks up, the standard deduction could exceed the point where it makes sense for taxpayers to take advantage of mortgage-related deductions, Hale said.
Home prices could fall
If the House's plan to cut the mortgage interest deduction to the first $500,000 of a loan becomes law, it will remove a benefit for new homeowners in many high-cost markets.
The share of recent purchase loans from $500,000 to $1 million is as high as 48% in San Francisco, 38% in Los Angeles, and 22% in the Washington, DC, area, Hale said.
"For some of those homebuyers, the lack of those deductions might mean it makes sense to buy a home or it doesn't make sense to buy a home," Hale said.
Home prices could fall because of lower demand. But more-expensive markets would be hit hardest. DC, Hawaii, California, New York, and Connecticut have the most people with mortgages over $500,000, according to The Washington Post.
The effect of changing the mortgage interest deduction threshold would also depend on the share of homeowners in each area already itemizing the deduction.
The House's proposal would affect trade-up buyers more than first-time buyers, except in some more expensive markets where even entry-level homes cost more than $500,000.
The lower deduction would apply to only new mortgages. Still, homeowners whose properties are worth more than $500,000 may be discouraged from moving, since they could face a new tax bill. That could worsen the inventory shortage in some of the pricier markets, Hale said, since supply is already weak at the lowest price points.
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