Dive Brief:
- Federal tax reform proposals could end up raising taxes on middle-income homeowners, according to new estimates from the National Association of Realtors and PricewaterhouseCoopers. Under these types of tax plans, homeowners earning between $50,000 and $200,000 could see an average tax increase of $815.
- The study examined many elements of the administration's tax reform outline, but not the entire plan itself. It found that these types of changes could cause home values to drop by more than 10% in the near future, while areas with higher property or state income taxes could see even greater depreciation.
- For many homeowners who currently benefit from mortgage interest deductions, the removal of other itemized deductions and personal exemptions would raise their taxes. The study predicts that the total tax savings from claiming mortgage interest deductions and property tax deductions would fall 82% from 2018 to 2027.
Dive Insight:
The Trump administration has promised sweeping tax breaks and increased defense and infrastructure spending — pledges that some analysts worry could drive up the national debt sharply. Rumors earlier in 2017 anticipated the possibility of President Donald Trump attempting to tie infrastructure and tax reform together in order to advance both plans through Congress. However, the outline of the plan, unveiled in late April, called for a repatriation of corporate earnings from abroad but included no mention of infrastructure spending.
Tax reform, in turn, stands to be a potential drag on the still-recovering housing market. With only 34.2% of U.S. homes having seen their values move past their pre-recession high, the possibility for a 10% average decrease in home values could dampen the market's recovery.
Trump's tax plan also raises the standard deduction from $12,700 to $24,000 — a move that limits the pool of buyers eligible to claim the mortgage interest tax deduction. Other additions to Trump's tax plan, including throwing out local property-tax deductions, could stunt home-sales activity in markets with rapidly surging home prices, Bloomberg reported.
Increasing the standard deduction will likely hamper young, first-time buyers — a segment that accounted for 35% of buyers in 2016 — by driving up the loan size needed for the group to claim the mortgage interest deduction. New buyers, in turn, stand to face challenges to homeownership amid a lack of starter-home inventory and rising prices.