Tag Archives: mortgage interest deduction

How Trump’s tax plan will shift housing demand

Source: OC Housing News

Trump’s tax plan will shift housing demand from move-ups to entry-level

Like it or hate it, Trump’s Tax Plan will impact real estate markets across the County. By greatly reducing the tax advantage of mortgage debt, many renters may choose to remain renters rather than assume large debts to buy a house. However, by reducing taxes on lower-income Americans, Trump’s tax plan should stimulate demand for entry-level housing.

Photo: The Orange County Register

One of Trump’s tax proposals involves raising the standard deduction. The Trump Plan will increase the standard deduction for joint filers to $30,000, from $12,600, and the standard deduction for single filers will be $15,000.

So how would increasing the standard deduction impact the home mortgage interest deduction? When people file taxes, they can either itemize or take the standard deduction. Only high wage earners with deductible expenses greater than the standard deduction itemize, and most of them do so because they have a large mortgage debt that costs them more than $12,600 per year in interest.

At 4% mortgage rates, any family with a mortgage larger than $315,000 pays more than $12,600 in mortgage interest debt alone to prompt itemizing on taxes. Most Coastal California homebuyers borrow more than this amount because house prices are so high, it’s a necessity. If the standard deduction were raised to $30,000, only borrowers with mortgage debt exceeding $750,000 would pay the $30,000 in mortgage interest that provides them enough deductible expenses to itemize. A huge swath of Coastal California borrowers will stop itemizing and stop taking advantage of the HMID.

Further, since high-wage renters would have a $30,000 personal exemption, the pressure to buy rather than rent would lessen, reducing demand overall.

The current home mortgage interest deduction provides a strong incentive for high wage earners to buy rather than rent. This distorts the market in areas like Coastal California and inflates house prices, and in the end, the subsidy only benefits bankers.

An increase in the personal exemption is a major tax cut for low-income and middle-income Americans because it reduces their taxable incomes by $18,400 per year. Increased disposable income will increase demand for low-end housing. So while the increased personal exemption may reduce demand in high-cost neighborhoods, this may be offset by increased demand in low-cost neighborhoods.