Of the many changes to the U.S. tax code proposed in House Republicans' plan released this week, few are proving to be as contentious as the cut to the mortgage interest deduction (MID).
Under the proposal, homeowners would only be able to deduct interest on the first $500,000 of mortgage debt, half of the current $1 million threshold. The change would not affect existing mortgages, only mortgages on purchases made after the law is in force.
Owners of expensive homes would still be able to take the deduction on their first $500,000 of mortgage debt. If you have a $550,000 mortgage, for instance, you'd be able to deduct the interest on all but the last $50,000 of principal owed.
That hasn't stopped realtors and home builders' groups from slamming the proposal, calling it an unacceptable tax hike on middle class families living in expensive areas, like D.C. and San Francisco. “The nation's 1.3 million Realtors cannot support a bill that takes homeownership off the table for millions of middle-class families,” said William Brown, president of the National Association of Realtors, in a statement.
Similarly, Granger MacDonald of the National Association of Home Builders said “the bill eviscerates existing housing tax benefits by drastically reducing the number of home owners who can take advantage of mortgage interest and property tax incentives... capping mortgage interest at $500,000 for new home purchases means that home buyers in expensive markets will effectively lose this housing tax benefit moving forward.”
The rhetoric about “middle-class families” is largely at odds with the reality of who actually owns half-million dollar homes in the U.S.
Nationwide, only about 6 percent of new mortgages are valued at over $500,000, according to a report by the United for Homes campaign, a group that advocates for reforming the MID and making housing more affordable for low-income families. That figure is based on an analysis of mortgages issued in the United States between 2013 and 2015. If your mortgage is over $500,000, in other words, you're already in the top tier of American homeowners.
The fraction of households affected by the proposed MID change is significantly smaller than the 6 percent figure would seem to suggest. Nationwide, approximately 63.9 percent of families own their own homes according to the latest census data. Data from the Census and independent research firms indicate about 65 percent of homeowners owe at least some money on their mortgages.
So in a very back-of-the-envelope fashion, we can say the following: roughly 42 percent of American families (or 65 percent of the 63.9 percent who are homeowners) are paying off a mortgage. If 6 percent of them have a mortgage over $500,000, that means approximately 2.5 percent of Americans are paying mortgages on homes valued at $500,000 or more.
If half-million dollar homes account for a small portion of the mortgage market, in other words, they affect an even smaller share of the total U.S. population. That share of the population is likely to be fairly well-off: if you can afford a down payment and monthly payments on an $600,000 house, for instance, you're not exactly struggling financially.
“There is no policy rationale for the federal government to continue to subsidize mortgages of more than $500,000,” said the National Low-Income Housing Coalition in a 2015 report. “Certainly the few people who can afford to borrow more than $500,000 in home mortgages can afford to pay more in taxes.”
It is true in terms of housing, a half-million dollars means very different things in different parts of the country. In northern Minnesota, for instance, $600,000 will get you 7 bedrooms, 4.5 baths, and 6,000 square feet of living space. In San Francisco, on the other hand, it gets you 1 bedroom, 1 bath and a whopping 650 square feet.
Regardless of where you're buying that $600,000 home, under the GOP proposal you'd still be able to deduct roughly 5/6ths, or 83 percent, of your total mortgage interest — that's because you still deduct the interest on the first $500,000 of your mortgage value.
If you buy a $600,000 home, you're in the 25 percent income tax bracket and you have a 30-year mortgage at a 4.5 percent interest rate, that means you'd be paying about $1,700 more annually under the GOP proposal — a bummer, to be sure, but not exactly a bank-breaking figure for most families that can afford to pay over $3,000 a month on principal and interest alone.
Further compounding the issue, the mortgage interest deduction is one of the reasons home prices across the country are so expensive to begin with. A working paper published earlier this year by economists at MIT, Princeton and the University of Copenhagen concluded mortgage interest deduction induces homeowners to “buy larger and more expensive houses.”
That paper also found the MID has “a precisely estimated zero effect” on the rate of homeownership — people who can afford to buy a house will do so regardless of whether a mortgage interest deduction is in place.
It's hard to square those findings and the overall modest impacts of the GOP proposal's mortgage interest change with the apocalyptic rhetoric (“eviscerates existing housing tax benefits”) coming from its opponents.
Still, even supporters of the change aren't happy the savings from it are primarily being used to finance tax cuts for corporations and the rich. Diane Yentel, president and chief executive at National Low Income Housing Coalition, said in an email “Congress should reinvest the savings from the MID reform into affordable housing solutions, like the national Housing Trust Fund, rental assistance, or a renter’s credit, that would help the lowest income people in America.”