Radical changes in tax law are gaining traction in the House of Representatives aided by the certainty of Trump becoming president. Some of the proposals may make it cheaper to rent homes than to buy, especially if tax benefits on real estate disappear.
A viral article in the Wall Street Journal, published December 27 by Peter Grant and Laura Kusisto, discussed the concerns that real estate industry leaders feel in response to a Republican blueprint, passed in June 2016, to overhaul U.S. tax law.
“Among other things, the GOP blueprint calls for the elimination of the deduction for state and local property tax. Industry executives also worry the plan could severely cripple the mortgage interest deduction—long considered a sacred cow of U.S. tax policy,” the article stated.
One of the hopes of prospective homeowners is that, along with the joy of moving into their new home, they can also deduct many home-related expenses. The biggest tax break is reflected in the mortgage you make each month, since your interest may be deductible. Then, there’s the standard deduction, in which income is exempt from federal tax and can replace itemized deduction.
According to the Wall Street Journal’s explanation for the changes, Republicans would nearly double the standard deduction that taxpayers receive, which would eliminate the need to itemize deductions (like mortgage interest payments), which would, in turn, disincentivize homeownership. Mr. Trump proposed an even larger standard deduction.
The GOP plan also calls for eliminating the mortgage interest deduction for businesses, while preserving it for individuals. Finally, it plans to eliminate depreciation for businesses.
The article has elicited a furor from real estate experts who argue that results may approximate those of the 1986 tax changes, which eliminated double depreciation on commercial property and changed the way investors could take write-offs by capping the loss for passive investors. The result was that local and state newspapers listed foreclosures for months. The policy crippled real estate for a decade.
If the GOP’s blueprint materializes, fewer mom-and-pop homeowners will invest in real estate, since most do so for the tax incentives, and these will be upended. Wouldn’t the majority prefer to rent rather than own, particularly if renting is cheaper and tax benefits for owning have been eliminated? Furthermore, what does this mean for the housing market and for the broader economy?
Questions such as these have caused a lot of uncertainty in the real estate sector.
Image courtesy of Shutterstock