The Mortgage Interest Deduction

Photo by Cosmic Timetraveler on Unsplash

One of the most controversial aspects of the GOP’s new tax plan is the elimination of the mortgage interest tax deduction. The American Association of Realtors has already come out against the plan on the basis of its elimination. It’s likely to be a major issue in the fight for or against the bill.

How does the deduction work right now?

Right now, when most people buy a house they borrow money in a mortgage against the value of the house they’re buying. The company selling the mortgage makes its money by charging interest on the amount loaned. Taxpayers with mortgages get a statement from their mortgage company every year telling them what they paid in interest and what they payed against the principle of the mortgage. The part they paid in interest is subtracted from their income before calculating what they owe in income taxes.

This has the effect making the interest on the mortgage something like 20% cheaper because one in five of the dollars used to pay it would have been paid in taxes anyway.

How would the deduction work under the GOP plan?

All existing mortgages and new mortgages up to $500,000 would remain eligible for the deduction. Mortgages above $500,000 would not be eligible. Republican talking points on the plan say this provides “tax relief to current and aspiring home buyers.”

But there will be ripple effects, which is why the National Association of Realtors is so upset.

Consequences

The biggest and most obvious consequence is that the capping of the deduction creates a strong incentive to keep home prices below $500,000. If your home is worth more than $500,000 you can keep your mortgage deduction but it’s likely to be very difficult to sell.

A half million dollar home is an extravagance out in rural America but in large cities like Washington, D.C. that half-million-dollar home is a 2,000 square-foot town house. The backbone of the urban and suburban middle class lives in homes that will become very hard to sell under this tax plan.

The creation of a soft-cap on home values at $500,000 will push down values across the board. Billions of dollars in middle class wealth will be erased with the stroke of a presidential pen and with it many of the things that wealth was expected to pay for: retirements, college educations, business ventures, and the like.

Why are Republicans doing this?

The short answer is: politics. The GOP tax scheme needs to add no more than $1.5 trillion to the budget deficit in order to pass under the budget rules the Congress agreed to. Any more and it’s subject to a Democratic filibuster in the Senate. The other objectives of the bill — a massive tax cut for corporations and the elimination of estate taxes for the ultra-wealthy — cost more than that $1.5 trillion so the GOP needs to find ways to make up the difference. Since the very wealthy don’t usually need mortgages in the first place, this hits the “urban, educated, middle-class professional” demographic square in the teeth.

And deliberately so: those people tend to vote Democratic.

Tell Congress what you think!

There is probably not much time before the House votes on the GOP tax cuts. Text RESIST to 50409 to tell your representatives or Senators what you think about this or any other issue before Congress or use Facebook messenger to do the same thing by clicking here.