Thursday, Oct 18, 2018
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Real Estate

Tax overhaul plan poses big unknowns for homeowners


WASHINGTON — If you’ve been pondering how you as a homeowner or buyer might fare under the new Republican tax overhaul plan, here are a few points to consider.

Although the tax proposal got fattened up a little over the summer -- moving from a White House “outline” of barely one page to a “framework” now consisting of nine pages — there’s been minimal meat added to the bones regarding housing.

The mortgage interest deduction will still be preserved, but with the doubling of the standard deduction to $12,000 (single tax filers) and $24,000 (joint filers), many current itemizers taking the mortgage writeoff are likely to opt for the standard deduction.

That may sound fine to you — there are undeniable attractions to the idea of simplifying the tax code by allowing taxpayers to take a single, large deduction instead of itemizing multiple smaller ones — but it may not be a net benefit for you, depending on the final details. If, as expected, you lose the current personal exemption of $4,050, plus you’ve got kids, a spouse, a house, and other key deductions are eliminated, you could end up paying more in federal taxes, not less.

If most people take the standard deduction, the homeownership stimulant effects of the mortgage interest writeoff could be diminished and have an impact on home prices. A study by auditing and consulting firm PricewaterhouseCoopers this year found that reducing the number of taxpayers who claim the mortgage deduction — along with eliminating local tax writeoffs and factoring in lower marginal tax rates — could lower the investment value of homes and depress prices by an average of 10.2 percent.

The study was commissioned by the National Association of Realtors — hardly a disinterested party in the tax debate. But some academic studies also have concluded that there is a tax-subsidy component built into home values that would be depressed if tax incentives such as the mortgage interest deduction were cut or removed.

Last year a study by a Federal Reserve economist estimated that totally eliminating the mortgage interest deduction would cause the average household in the country to lose 10.9 percent of its home value.

The lack of detail in the Republican tax framework makes it difficult to calculate what the changes would mean for tax bills. The framework offers to collapse the current seven marginal tax brackets into just three — 12 percent, 25 percent, and 35 percent — but does not provide income cutoff points associated with each bracket. So you can’t be sure where you end up.

The framework is also coy about just which deductions taken by millions of individuals no longer would be permitted. It only identifies two personal deductions that would survive the cuts -- charitable contributions and mortgage interest. This leads to the inevitable conclusion that one of the biggest and most politically sensitive writeoffs, state and local taxes, would not survive. 

State and local tax writeoffs are an important part of the financial calculus for many home purchasers and owners. Their elimination would add an estimated $1.3 trillion to federal tax revenues over the next 10 years. State and local deductions are most heavily claimed in areas with higher than average property and income tax rates, such as Washington and New York. 

So where’s this all going and how fast? Stay tuned. 

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