NAR acknowledges the complexity of the current tax system and seeks to assure that tax reforms support the goals of homeownership and freedom to buy, maintain and sell real estate.
Under the current tax law, homeowners are allowed a deduction for mortgage interest paid. The deduction is generally allowed for interest paid on mortgage debt of up to $1 million, and is available for interest on mortgages for a principal residence and one additional residence. The $1 million limitation represents the combined allowable debt on two residences. Mortgage interest on up to $100,000 of debt on home equity loans or lines of credit also qualifies for the deduction.
Tax reform has been near the top of the legislative agenda for several years now, even though that term has a generally different meaning for Republicans and Democrats. As part of its budgets for several years, the Obama Administration proposed reducing the value of all itemized deductions (including the mortgage interest deduction (MID)) for higher-income taxpayers.
In early 2014, former House Ways & Means Committee Chairman Dave Camp (R-MI) released a tax reform plan that would have drastically reduced the benefit of the MID. Specifically, the proposal would have lowered the cap on the size of mortgage loans for which the interest is deductible from the current level of $1 million to $500,000 in four steps. But much more significantly, the proposal would also have reduced the number of taxpayers eligible to claim the MID from around 33 to 35 percent today to an estimated 4 to 5 percent. This would happen because the plan would have nearly doubled the standard deduction while eliminating most itemized deductions. The Camp plan did not garner any significant support from even House Republicans.
However, in mid-2016, House Speaker Paul Ryan (R-WI) and Ways and Means Chairman Kevin Brady (R-TX) released a fairly comprehensive tax reform plan outline known as the “Blueprint” that included many of the features of the Camp plan. The Blueprint would almost double the standard deduction and eliminate the deduction for state and local taxes paid, along with other itemized deductions, except the MID and the deduction for charitable contributions. The effect of this plan would be the same as that from the Camp plan from 2014 – an 85 percent reduction in the benefit of the mortgage interest deduction, along with a 100 percent reduction in the property tax deduction.
The Blueprint was not taken very seriously by policy-watchers until the results of the 2016 election were known. Republican proponents of tax reform would command majorities in both Houses of Congress and also occupy the White House. This appeared to knock down a barrier that had been preventing tax reform from moving forward over the past eight years – lack of enthusiastic presidential support. Now that President Trump has endorsed most of the goals and major provisions of the Blueprint plan, including the ones that would most endanger the MID, REALTORS® are on high alert that tax reform could threaten most of the tax benefits of owning a home.