How Trump's Tax Plan Will Hurt Some Homeowners and Help Others

By KC Hernandez ; Updated June 21, 2017
Document with title Trump Tax Plan

Middle-income earners may have less reason to buy homes under proposed tax plans. But some argue that with more money in tax savings, they will buy anyway.

Simplifying the tax code is challenging, which may be why it hasn't been done in more than 30 years. But the Trump administration claims it can implement changes that would make it fairer, more comprehensive and stimulating for the economy as early as September 2017. The real estate sector often finds itself on center stage when it comes to discussions about the state of the economy, and it is also a central component of the proposed tax plans. Reduced tax brackets, lower tax rates on remaining brackets, and doubling the standard deduction will affect homeowners in many ways, but according to the National Association of Realtors (NAR) stats, middle-income homeowners stand to lose.

Effects on Homeowners

The parts of the plan that will directly impact homeowners are:

  • Reduction of the number of tax brackets to four – there are currently seven
  • Eliminating income tax for households earning less than $50,000 a year – there are more than 73 million
  • Raising the standard deduction for unmarried individuals to $12,700 and married to $25,400 – double the current deductions
  • Retaining the mortgage interest deduction

Keeping the mortgage interest deduction and doubling the standard deduction will keep more money in some homeowners' pockets, according to Robert Freedman of the NAR. But middle-income households stand to lose the most if the proposal passes, as the higher standard deductions would still be too low to offset their losses when compared to itemizing their deductions. Although they would still be able to take the mortgage interest and charitable contribution deductions, claiming these would only benefit them if the deductions totaled more than the new standard deductions of $12,700 or $24,700, according to Freedman. The loss of the real estate tax deduction, mortgage insurance premium deduction, and state and local taxes deduction would cancel out any benefits of the proposed tax plan for middle-income homeowners. The NAR estimates that 95 percent of homeowners would choose the standard deduction if the proposed plan passes, rather than itemize, which would not yield the same tax savings as it currently does.

How Current Code Encourages Homeownership

The current tax code makes it possible for mid-income homeowners to have a larger net gain after taxes, as opposed to mid-income renters. By itemizing the deductions they can take as homeowners that aren't available to renters, such as real estate taxes, mortgage insurance and interest, and state and local taxes, they come out saving more in taxes than they would as renters, offsetting the increased housing payment they take on when they become homeowners.

The NAR surveyed homeowners across the country to come up with a common first-time buyer scenario of a middle income earner. For example, if a single person making $65,000 annually rents in Colorado for $1,000 per month, but decides to buy a condo for $265,000 with only a 5 percent down payment, they end up paying $1,193 in principal and interest, so the housing payment goes up only $193. But when you figure in the itemized deductions available for homeowners, the net savings in taxes total $3,300 a year, or a savings of $275 a month. Suddenly homeownership costs less than renting, with the added benefit of building future equity. Under the proposed tax plan, the same homeowner would realize a lower net gain in taxes of only $150. Although it's still a net gain, it doesn't make homeownership as affordable when compared to renting.

How It Might Help Others

Having more money in their pockets as a result of the new tax plan might actually encourage homebuying, according to Trulia chief economist Ralph McLaughlin. In contrast to the NAR's position that the proposed tax cuts would hurt home values and homeowners, McLaughlin points out that tax cuts typically increase the demand for housing, as buyers tend to put any extra money they may have toward their housing.

About the Author

K.C. Hernandez has covered real estate topics since 2009. She is a licensed real estate salesperson in San Diego since 2004. Her articles have appeared in community newspapers but her work is mostly online. Hernandez has a Bachelor of Arts in English from UCLA and works as the real estate expert for Demand Media Studios.