How a Trump administration may change the mortgage interest tax deduction

by Peter Thomas Ricci

Donald Trump

Steven Mnuchin, a former investment banker who is President-elect Donald Trump’s choice for Treasury Secretary, made headlines a couple weeks ago when, in his first official interview as Treasury nominee, he suggested sweeping changes are in store for the country’s tax system – including the much-beloved mortgage interest tax deduction, or MID.

“This will be the largest tax change since Reagan,” Mnuchin told CNBC, adding “we’ll cap mortgage interest, but allow some deductibility.”

Unsurprisingly, housing trade groups perked up when Mnuchin mentioned MID, which is often floated to middle-class consumers as a main perk of homeownership. How could MID change, though, under what Trump and Mnuchin are proposing?

Itemizing and the MID

In order to understand how Trump and Mnuchin could change MID, it’s important to know the three basics of Trump’s tax plan.

They are: reducing the number of tax brackets from seven to three, with the highest tax rate being 33 percent; increasing income exemptions for single filers from $6,300 to $15,000, and married couples’ to $30,000; and with the higher exemptions, itemized deductions would be capped and/or less necessary.

So how does that affect MID? Dan Bobkoff of Business Insider offered an interesting perspective. With income exemptions rising to $15,000 for single filers and $30,000 for married couples, a homeowner’s mortgage interest may not exceed those exemptions, and thus, they would not have to itemize their deductions for a greater tax break; so in effect, the MID loses some of its bite, as homeowners would no longer need to itemize and take advantage of it – and homeownership, as a result, would lose some of its tax perks.

Industry reax to Trump’s tax plans

Suffice to say, not everyone in real estate is on board with these new plans.

For instance, William Brown, the president of the National Association of Realtors, is not a fan.

“Doing anything that would limit incentives for homeownership is a fundamental step in the wrong direction that could harm home values and keep more buyers on the sidelines,” Brown said in a statement to Business Insider.

Jerry Howard, the CEO of the National Association of Home Builders, said to RollCall.com that the new plans “would be a sign the government is not encouraging homeownership … There needs to be an open, candid debate about whether the government should be in the business of encouraging certain kinds of social behavior.”

And Michael Fratantoni, the chief economist at the Mortgage Bankers Association, argued to Business Insider that the “mortgage interest deduction helps homeowners by lowering the cost of their interest on an after-tax basis,” particularly for first-time buyers.

How the housing market could change

The mortgage interest tax deduction has long been described as a third rail of American politics, so it’s hardly guaranteed that a Trump White House would succeed in curbing its influence. If Trump’s proposed tax plans do go into effect, though, how could the housing market change?

As Bobkoff detailed in Business Insider, consumer habits in homebuying could change. Because the MID is more effective for larger amounts of money, economists have argued that MID incentivizes the purchase of bigger, more expensive properties – so with MID no longer a part of the equation (and that incentive for higher-priced home purchases gone), housing may become more affordable as demand declines and home prices fall in expensive markets.

Indeed, research clearly shows that because of how the MID incentivizes more expensive home purchases, its benefits are disproportionately enjoyed in higher income brackets – in other words, by those with the least housing needs:

Income Group Benefit from MID, in Billions (2007-2012) # of Homeowners w/ Severe Housing Cost Burdens
Less than $10,000 $0.0 3.2 million
$10,000-$20,000 $0.1 2.4 million
$20,000-$30,000 $0.2 2.0 million
$30,000-$40,000 $0.6 1.1 million
$40,000-$50,000 $1.2 0.6 million
$50,000-$75,000 $5.9 0.7 million
$75,000-$100,000 $7.6 0.3 million
$100,000-$200,000 $29.0 0.1 million
$200,000-plus $23.6 0.0 million

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