This month Republicans in the House of Representatives unveiled their proposed overhaul of the U.S. tax code. The package included a number of significant changes — but few are turning heads as much as the proposal to cap the mortgage interest deduction for newly purchased homes at $500,000, compared to the current cap of $1 million. And while the proposal presents potential challenges for homebuyers in high-priced markets like Greater Boston, it’s not time to panic quite yet.
Under the plan, current homeowners will be grandfathered in, but prospective homebuyers will now be eligible to deduct interest payments only on mortgages up to $500,000. The inclusion of the proposed cap in the GOP plan is not totally surprising, but it is curious that lawmakers chose to so substantially reduce an incentive that has a major impact on promoting homeownership, and to go against the advocacy efforts of groups like the National Association of Home Builders and the National Association of Realtors, for whom a reduction in the cap has always been a concern.
For individuals and families hoping to buy homes in and around Boston, the proposed cap presents a significant consideration. In nearly 3 dozen cities and towns in the Greater Boston area, median home prices in 2017 exceeded $625,000, meaning homebuyers in those communities are more likely to have mortgages in excess of $500,000. And Boston is not alone — consumers in other high-priced housing markets, like San Francisco and Washington, D.C. will be faced with tough choices if the current plan is approved.
However, it’s important to understand that mortgages over $500,000 represent only a small fraction of all mortgages issued nationwide; according to data from CoreLogic, fewer than 3 percent of home mortgages are more than $500,000. As such, many prospective home buyers in less expensive housing markets would not be substantially affected by the proposed change.
The proposal could impact the housing market as a whole, as consumers who currently hold mortgages over $500,000 and would be grandfathered in under the plan may delay selling their homes to keep their deduction. The result could be less turnover, particularly in higher end real estate, of which Massachusetts has plenty.
And yet, as things stand today, this proposal should not change anyone’s plan for becoming a homeowner. First of all, it remains unclear whether it will ultimately pass; in fact, just days after the House unveiled their plan, the Senate introduced their own proposal, which maintains the $1 million cap for the deduction. Secondly, there are so many things outside your control when buying a home — like the tax code — that, at least in the short term, prospective homebuyers should remain focused on the things they can control, like what location and property type they want, and what purchase price they can afford.
From a policy perspective, Washington has been an increasingly dysfunctional place, but tax reform may offer some avenues for compromise, and the mortgage interest deduction can be an important element in those negotiations. Lawmakers seeking to adjust the cap on the deduction should work with industry experts and consumer groups to construct a plan that both returns important savings that can be deployed elsewhere in the tax code to reduce the burden on working class families and avoids creating a downturn in major housing markets that could spill over into other areas.
Potential homebuyers — especially in high-cost markets — should keep a watchful eye on the negotiations as they go forward, but shouldn’t dramatically alter their plans just yet.