Middle Class Homeowners Pay the Tab for the GOP Tax Plan

Despite polling at a 25 percent approval rating, the Republican Tax Cuts & Jobs Act bill is barreling ahead, having just passed in the House of Representatives on a mostly party line 227-205 vote.

With this first hurdle cleared, some in the GOP-led Congress are hopeful that President Trump’s goal of signing the bill by Christmas could become a reality as the bill moves into the Senate.

Homeowners are hit particularly hard by the bill, which lowers the cap on a popular tax deduction and threatens to depress real estate markets. Accordingly, the bill has drawn criticism from both sides of the aisle and from outside the political world who have decried it as an attack on homeowners and homeownership in general.

Capping the Mortgage Interest Deduction

One of the most direct effects the GOP tax bill will have on homeowners applies to the mortgage interest deduction. Currently, the federal mortgage interest deduction allows homeowners to deduct their mortgage interest payments from their taxable income on the first $1 million of home debt.

The Republican bill caps that at $500,000, essentially applying a tax to homeowners with mortgages over $500,000 who previously enjoyed the deduction.

For homeowners still paying significant amounts of interest on their mortgage, the mortgage interest deduction is a boon come tax season. In the first year of a $500,000, 30-year fixed rate mortgage, a homeowner can pay as much as $20,000 in interest, which can currently be deducted from taxable income.

Homeowners in areas with under-$500,000 homes and lower taxes will likely not see much of an effect from the bill. Meanwhile, higher-cost cities and states will be most affected – especially areas along both coasts that typically vote Democrat. Indeed, the only House Republicans to vote against the measure represented those areas in New York, New Jersey, and California.

In general, the tax bill benefits the rental market at the expense of homeowners. Corporate landlords see a tax deduction while renters are given less tax incentives to buy a home. This will send ripples throughout national real estate markets.

Home Values Drop as Much As 10 Percent

While homeowners with mortgages under $500,000 won’t be affected by the interest deduction, they may still see negative side effects from the bill.

Chief among these is the potential drop in home value. The National Association of Realtors (NAR) has warned since May that the GOP tax plan would “cause a 10 percent drop in home values and raise taxes on middle-class homeowners by an average of $815.”

So even if homeowners aren’t affected the new deduction cap, their home value may drop as a result of the tax bill’s effect on real estate markets as home sales in the over-$500,000 market drop.

And for homeowners who may also lose the mortgage interest deduction, this drop in market value could leave them underwater on their mortgage.

Opposition from Real Estate and Home Building Professionals

A Quinnipiac poll released last week showed that only 25 percent of those polled approved of the bill, with only 60 percent approval among Republican voters. And while the bill is widely unpopular with voters, it’s even more unpopular with non-partisan associations in real estate, homebuilding, and tax law.

Like the deluge of healthcare associations that opposed the GOP’s healthcare bill earlier this year, a number of groups have come out in staunch opposition to the bill.

NAR has long stated its opposition to the tax bill for leaving homeowners holding the bag; the organization has released multiple statements and commercials decrying the bill for targeting homeowners.

After the tax bill passed the House, NAR President Elizabeth Mendenhall said in a statement, “Make no mistake, middle-class homeowners will see their home values fall if this proposal moves forward, while large corporations walk away with the bulk of the tax cuts.”

Mendenhall further emphasized that “homeowners will be the ones paying the tab.”

The National Association of Home Builders (NAHB), which bills itself as an organization obsessed with one thing – expanding home building and homeownership nationwide, has also come out in strong opposition to the bill.

NAHB chairman Granger MacDonald criticized the tax bill in a statement after its passage for threatening the value of most Americans’ biggest asset: their home. He also attacked the bill for its cuts to affordable housing, stating “With the nation already in the midst of an affordability crisis, undermining the LIHTC will deal a crippling blow to keep housing affordable and available for those citizens who are most in need.”

President Donald Trump, a real estate investor, has himself criticized the idea of attacking the mortgage interest deduction, tweeting in 2013, “Getting rid of the mortgage interest deduction would be a disaster for homeowners, who have suffered enough!”

And Bill Gale, co-director of the bi-partisan Tax Policy Center told Newsweek, “This will negatively impact both existing and new home prices, it will hurt home ownership rates and it’s a double hit for people living in urban areas because of the proposed cuts on state and local tax deductions.”

A Bad Bill for Homeowners

With little public, political, or industry support, the Republican-led Tax Cuts & Jobs Act now moves to the Senate for consideration and an expected vote. The GOP only needs 50 votes to move the legislation forward and only one of 52 Republican Senators has announced a “no” vote.

With a razor-thin margin, President Trump and Congressional Republicans may get their Christmas wish to pass tax reform, leaving American homeowners to pick up the tab.