Tax reform proposals swirling around Washington, D.C. right now make some sweeping changes to the tax benefits for homeowners. For taxpayers in Washington state, these changes could have costly consequences.
More than seven of every 10 hard-working homeowners (72 percent) in our state have a mortgage, and 839,530 of them claimed a deduction for mortgage interest (MID). These deductions totaled $8,610,219,680 in 2015.
This deduction, however, will likely have significantly less value if Congress goes through with the Tax Cuts and Jobs Act passed by House Republicans. Under the plan, the mortgage interest deduction is capped at $500,000 and far fewer homeowners would itemize their taxes, taking the MID off the table.
Tax incentives like the mortgage interest deduction are particularly important to current and prospective homeowners in our region. Northwest Multiple Listing data show more than nine out of 10 listings of single family homes on the Eastside are currently priced at $500,000 or more.
The bill from Senate Republicans is not much better. While it doubles the mortgage interest deduction to $1 million, it allows no deductions for state and local tax deductions. It would also punish those who need to move, whether to relocate for employment or other reasons. To qualify for a capital gains exemption, homeowners would need to live in their homes for five out of eight years instead of the current requirement of two out of five years.
The most recent IRS data shows that at a marginal rate of 25 percent, the average taxpayer saved $2,564 in taxes in 2015 as a result of mortgage interest deduction. Congress is looking to reclaim those savings, taking it right from the pockets of homeowners.
The mortgage interest deduction isn’t the only deduction homeowners will lose out on, either. Homeowners are currently allowed to deduct the property taxes they pay to state and local governments, but that deduction is in jeopardy. That means homeowners will experience “double taxation” as their income is taxed at the federal level and then again for state and local property taxes.
Any tax overall proposal that undermines existing incentives for homeownership would harm working-class families. Moreover, the proposed legislation could cost our children and grandchildren $1.5 trillion in new federal debt.
In 2015, IRS data show 950,010 taxpayers in Washington claimed a deduction for local real estate taxes. On average, these taxpayers subtracted $4,692 from their taxable income. The total amount deducted was nearly $4.5 billion.
If the MID and real estate tax deductions were eliminated, the loss would not be a one-year event; homeowners lose out on these potential savings each and every year.
Homeowners pay 83 percent of all federal income taxes. Tax reform is important, but the final product should reflect the tremendous value that homeownership offers the community.
Incentives that support homeownership and the wide-ranging benefits it offers should be preserved. Current homeowners and those who aspire to own their own home who agree should speak out and let members of Congress know where you stand.
Sam DeBord is 2017 president of Bellevue-based Seattle King County REALTORS® and is a managing broker at Seattle Homes Group/Coldwell Banker Danforth.