WATCH PPAR Cares: Tax reform proposals weaken incentive for homeownership
Most people across the nation would agree that tax reform is necessary in this country. Many feel that the tax code has become so huge and complicated – with layers and layers of different codes added year after year – that the average person cannot file their own return anymore. Citizens are feeling that taxes need to be revised and simplified, and the bills that have been emerging from the White House and the House of Representatives have been aiming to do just that. However, these proposals are also proving detrimental to middle-income homeowners. According to the National Association of REALTORS® (NAR), tax reform proposals discussed to date would lower tax rates and raise the standard deduction, which in order to pay for these changes, there would be a scaling back of certain real estate tax provisions.
“We looked at these tax reform proposals from a real estate perspective, because being with NAR, we are the trusted voice for real estate,” said Randy Reynolds, Director for NAR. “We analyzed how the proposed legislation may affect homeowners – either positively or negatively – so that we can let our 1.3 million members know, so they in turn can inform all their homeowners and clients.”
To run the analysis, NAR hired an outside firm, world-renowned PricewaterhouseCoopers, to examine available data regarding the proposed tax reform. They took plans based on all the information that was published or known, and started running different examples of how homeowners would be affected should the proposed legislation pass. What they found out is that the average middle class homeowner – that is, homeowners who make $50,000 to $200,000 annually – would see average tax increase of approximately $850 dollars. The same income range for non-homeowners (renters) would see a reduction in taxes of $516.
“This poses the issue that the tax reform proposal is not going in the direction we feel it should to incentivize people to buy homes,” said Reynolds. “We’ve had incentives in our tax code since the early 1900s for homeowners to buy property, and I think everyone saw the advantages of homeownership early on: how it helps the homeowner to build wealth over a period of time, how it helps make neighborhoods more stable and also the general pride of ownership. You can see across the country that neighborhoods primarily with homeowners do a lot better than those where people are constantly moving in and out.”
The biggest incentive that would be affected is the mortgage interest deduction. “They’ve left the mortgage interest deduction in the plan, along with charitable deductions, but they’ve raised the standard deduction. The standard deduction used to be about $12,200 for a married couple, and they are raising it to $24,000,” said Reynolds. Most people don’t have $24,000 worth of deductions every year, so the tax reform would eliminate approx. 95 percent of those taking mortgage interest deduction on their home. “If homeowners are no longer able to deduct their mortgage interest, then it can potentially change everything they founded their wealth-building on, hurt the housing sector and unfairly harm homeowners, who already pay 83 percent of all federal income tax. This proposal also eliminates state and local tax deductions.”
There is also talk of eliminating the Section 1031 provision, which currently encourages growth by permitting real estate held for investment to be exchanged for property of a like kind on a tax deferred basis. It’s a huge part of what property investors do, so that they don’t have to pay huge tax gains every time they sell commercial property – or small apartment buildings or even residential properties. “You kind of have to ask yourself do we want a nation of homeowners or a nation of renters. And we’ve seen over the years, time and time again, people that own their homes generate more wealth,” said Reynolds. History shows that renters generally do not accumulate wealth over the long haul. The latest Federal Reserve data shows that since 2010, the typical wealth of a renting household has fallen, from $5,900 to $5,100, while home-owning households have seen their wealth jump from $192,000 to $231,400.
Another issue that the PricewaterhouseCoopers report stated, is that if the tax reform pushes people to rent instead of buy, then there will be a change in the supply and demand of real estate, at which point home prices have a tendency to drop. The report is estimating a 9-12 percent drop across the nation. “There are still some pockets around the U.S. that are not totally back to where they were prior to recession,” said Reynolds. “So if we see a 9-12 percent drop in home values, it can put people right back under water again, and that can bring all kinds of problems.”
There’s projected to be more than 35 million households that will claim itemized deductions for 2018, and almost three-fourths of them have incomes between $50,000 and $200,000. According to SuburbanStats.org, El Paso County has 152,293 owner occupied homes, and approximately 72 percent of those have mortgages. This new proposal could affect the majority of these homeowners; and the majority of homeowners statewide and nationwide. According to the NAR, proposals that limit itemized deductions – even if not directly changing rules applicable to mortgage interest – could have serious negative consequences for homeowners.
No tax reform legislation has been introduced in the current Congress, but Reynolds shared that the proposed tax reform may come up for a vote sometime in late October or November. It’s essential that current and potential homeowners across the nation call their Congressman and Senators and express their concerns about the proposed tax reform and how it will impact them.
To read the full PricewaterhouseCoopers report, visit http://narfocus.com/billdatabase/clientfiles/172/21/2888.pdf
To learn more about the Pikes Peak Association of REALTORS®, visit PPAR.com.
To learn more about the National Association of REALTORS®, visit NAR.Realtor