Will the New Budget Affect Homeowner Tax Breaks and the Real Estate Investment Market?

Housing affordability is a key component of making ownership more appealing to people that currently rent. Owning property costs more upfront than renting, but when tax breaks are factored in, the financial benefits start to take shape. While homeowners get to claim deduction after deduction on their taxes each year, renters are left with just about the same tax bill that they started out with.

This is an important selling point for ownership. Experts have argued that housing tax breaks are just as beneficial for the businesses that are selling and lending as they are for the people that are buying homes. The rhetoric for the last several decades has centered around the idea that housing subsidies support and promote the American dream of owning a home. In fact, when President Reagan was in office, he made it clear to the Treasury Department that the mortgage interest deduction (MID) was off-limits as far as tax reforms were concerned, because it “preserved that part of the American dream.”

For people that have bought, sold, and owned a home in the last 100 years, deductions for mortgage interest and property taxes seem to be a given that is written in stone, when in fact they are a part of the tax code that can be changed at any time. And whenever there’s talk of revenue generation, homeowner tax breaks are almost always put in the spotlight. We don’t know exactly what the next budget will be, but we do know that while the mortgage interest deduction is still around in its current form, people interested in investing should strike before it goes away. It is always important to know that in a fluctuating economy, politics could make what seems like a permanent feature become nothing more than a memory.

Today, legislators on both sides of the aisle agree that tax reforms are in order, but how they will affect homeowners and the real estate industry as a whole in the coming years is less clear.

Lessons Learned from Past Tax Reforms

Mortgage interest was lumped together with all other types of interest deductions in the Revenue Act of 1913. The mortgage interest deduction wasn’t officially identified in the internal revenue laws until 1986, but by then it had already been under fire. A 2010 paper by law professor Dennis J. Ventry, Jr. pointed out that tax reformers have tried to do away with the MID, property tax deductions, and other housing tax breaks since the 1950s, and real estate professionals have staunchly defended it.

In the 1960s, reformers within the Treasury Department were successful in raising the standard tax deduction, which led to less MID beneficiaries. But support for the MID remained strong through the 1970s. The financial crisis of the 1980s turned policymakers’ attention to raising revenue, but as mentioned earlier, Reagan took eliminating the MID off the table. However, the Tax Reform Act of 1986 did lower the overall value of housing subsidies, which did not make the National Association of Realtors happy. They countered with a 1988 campaign that promoted preserving the MID for more homeowners and future buyers.

Clearly, housing tax breaks are serious business for people that make their income buying and selling real estate. Because of the market fallout in 2008, no one considered touching the tax incentives. Instead, new benefits were added for first-time homebuyers in an effort to bolster the industry. However, now that the market has stabilized, the latest deficit debates have reignited the discussion of whether housing tax subsidies should be reduced in an attempt to raise more revenue.

Like all tax breaks, the fate of the MID and other housing subsidies are always up for discussion among tax reformers.

What’s in Store for Housing Subsidies Next Tax Season

Even though the mortgage interest deduction will cost an estimated $113.4 billion in lost tax revenue in 2015, it isn’t likely to go anywhere anytime soon. Year after year, it is one of the costliest tax expenditures, but it is also one of the most entrenched.  The good news for homeowners and real estate professionals is that no current legislative members, nor the White House, are calling to end the MID for the vast majority of Americans.

However, President Obama’s latest budget does call for a reduction in the mortgage interest deduction for top earners. His plans would limit itemized deductions, including MID, to just 28% of their income. This could have a significant impact on builders and developers that specialize in luxury homes. But the chances of the Republican-held Congress passing such a measure is essentially zero. Congress knocked a very similar measure down last year and they are poised to do the same this year.

There was talk of tax reforms last year that would have affected all homeowners. Former Ways and Means Committee Chairman Rep. Dave Camp laid out a plan that would have reduced the mortgage limit for the interest deduction from $1 million to $500,000, eliminated tax breaks on home equity loans, and done away with property tax deductions among numerous others. All of this was in exchange for an overall lower tax rate. Suffice to say, the dramatic reform measures didn’t make it out of the committee. Camp has since retired, so no one is likely to champion his plan this year.

While Republicans and Democrats both agree that the tax code needs to be simplified and they appear to be on the same page with a few business tax reforms, there’s less consensus on ending housing tax breaks. The tax deductions that have made home ownership more affordable this year are expected to remain unchanged for at least the next few years.

How an Uncertain Future Can Make a Promising Present

The “next few years” might seem a long way aways for many people, but the real estate market has to look at those horizons. We are now in a post-recession housing boom, but changes to the tax code could slow that down a few years out. Right now, the market to invest and sell is potentially close to a peak.

Uncertainty generally isn’t a friend, but people on the fence about owning a home may look at an uncertain future and decide they want to get in on the action quickly. That means investors, builders, and rehabbers need to stay ahead of the curve and act now, before changes to the code quells the housing market.

All developers, builders, rehabbers, and investors can benefit from the reliable hard money loans provided by Socotra Capital, whether or not housing subsidies remain in place. Our equity-based, hard money loans enable real estate professionals to help more people realize the dream of homeownership in California. Start the process today and and give yourself a chance to secure the financing needed to obtain property.

Your real estate assets are your best investments for the future. At Socotra Capital, we’re proud to be the premier direct hard money lender for California real estate. Contact us today to learn more about how we can help. 

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