We’re suckers for that classic fantasy of the American dream. White picket fence, an immaculate lawn that resembles the outfield at Fenway Park…and most of all, a house to call your own.
But the GOP’s tax plan tosses that dream a curveball by decreasing the amount by which you can take the mortgage interest deduction.
“That means nothing to me”—you
Not yet, it doesn’t. But hear us out.
For over a century, the U.S. allowed its citizens to write-off the interest you pay on a mortgage from your taxable income. Let’s take a closer look at how this works (warning—some math lies ahead):
After a down payment, you took out a loan on a stunning 3 BR in Iowa City for $400,000 at a 5% interest rate. So, you’ll be paying *crunches numbers in head* $20,000 a year in interest. Pretty steep, but the neighborhood does have a jivamukti yoga studio.
You’ve also got a solid job writing emails for about $70,000 a year. What this tax break allows you to do is subtract the $20k in interest from that income.
When all is said and done, you save $5,000 a year in taxes just for owning a home.
Enough math for one morning, back to the tax bill
The existing U.S. laws permit you to deduct interest from the first $1 million of your mortgage. Now, that’ll be lowered to $750,000. And since the new bill doubles the standard deduction (a lump sum), you might choose to go that route instead of itemizing each deduction individually (the only way you can take the mortgage interest deduction).
It’s enough of a change that Zillow estimates the deduction makes sense for only 14.4% of U.S. homes, a steep drop from 44% currently.
Which is pretty upsetting to the real estate community. The National Association of Realtors warns that house prices will sag under slack demand for expensive houses, and a study backs them up: under the new policy, home prices will decrease 4% by mid-2019...and up to 10% in the most expensive markets.
After all, convincing someone to buy a house (a big one, in this case) is a lot easier if you can put more cash back into her pocket.