The House of Representatives on Thursday approved the Tax Cuts and Jobs Act, a Republican tax reform package that some housing trade groups warn could hurt home sales because it cuts the mortgage interest deduction (MID) in half.
The sweeping tax overhaul plan passed 227 to 205. Thirteen Republicans voted against the measure, while 227 supported it. On the other side of the aisle, 192 Democrats voted against the bill, and none voted for it. Two Democrats did not vote.
The bill, which now moves to the Senate, would slash the MID threshold from $1 million to $500,000. Some housing experts say this would hurt home sales by essentially eliminating an incentive to buy.
Supporters of the bill, however, argue that reducing the MID won’t have much effect because home buyers don’t typically base their decision on tax breaks.
Supporters of the House version also argue that the reduction in the MID would be offset by the bill’s other provisions, which provide tax cuts for most middle-income families.
The bill faces an uphill climb in the Senate, mainly because it will need to be reconciled with a similar tax plan recently introduced by Senate Republicans. However, unlike the House bill, the Senate version keeps the MID intact.
As such, the Senate version is the one preferred by most housing groups, including the National Association of Realtors (NAR) and the National Association of Home Builders (NAHB), which have vociferously opposed cutting the MID.
Although a recent analysis conducted by ATTOM Data Solutions shows that cutting the MID would mostly hurt the luxury housing market, NAR thinks it will “have large negative impacts for a wide swath of America’s residential real estate.”
“In particular, the cap on deductible mortgage interest, the elimination of the deduction for state and local interest and sales taxes, and the change to the capital gains exclusion will impact large segments of the market,” NAR says in a statement. “Worse, the current historically low mortgage rates mask the negative effect that these changes will have on homeownership, which will only grow as interest rates and home prices rise in the future.”
“Lawmakers missed a golden opportunity to give the American people a tax reform package that would boost middle-class families and promote greater housing opportunity for Americans across the economic spectrum,” says Granger MacDonald, chairman of NAHB, in a statement. “This plan is particularly disappointing, given that the nation’s home builders warned that the proposal would severely diminish the effectiveness of the mortgage interest deduction and presented alternative policies that would retain an effective housing tax incentive in the tax code.
“NAHB worked closely with leaders of the House Ways and Means Committee to develop a better homeownership tax incentive that will ensure the middle class – not the wealthy – benefits,” Granger said. “Last week, it appeared that we had a deal that would establish a meaningful homeownership tax credit that would benefit tens of millions of households. Unfortunately, we were told by the House leadership that the credit will be removed from the bill.
“By sharply reducing the number of taxpayers who would itemize, what’s left is a tax bill that essentially eviscerates the mortgage interest deduction and strips the tax code of its most vital homeownership tax benefit,” Granger noted. “This tax blueprint will harm home values, act as a tax on existing home owners and force many younger, aspiring home buyers out of the market.
“Given that owning a home is the largest asset for most American households, it makes little sense to offer a tax bill that effectively abandons the nation’s long-standing commitment to housing. This plan will hurt millions of hard-working American families and marginalize homeownership. The American people deserve better,” Granger concludes.
The Mortgage Bankers Association (MBA) is also opposed to certain aspects of the House bill, including the slashing of the MID. In a statement released earlier this month, David Stevens, president and CEO of the MBA, said the proposed $500,000 cap on post-Nov. 2, 2017, acquisition indebtedness for MID, along with the elimination of deductibility of interest on home equity loans and limitations on the deductibility of state and local taxes ($10,000 cap on property taxes), would together negatively impact homeowners and prospective buyers in individual housing markets around the country.
“The cumulative impact of the changes to the MID and property tax deductibility [in the House tax plan] would erode homeownership incentives for too many Americans,” Stevens said. “We believe Congress should take this historic opportunity to think creatively about new homeownership incentives targeted more efficiently to low- to moderate-income borrowers, such as the proposed 12% homeownership tax credit based on qualified mortgage interest plus property tax.”