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It Gets Stranger: How Trump’s Tax Plan Impacts Homeowners & Real Estate Investors

G. Brian Davis
6 min read
It Gets Stranger: How Trump’s Tax Plan Impacts Homeowners & Real Estate Investors

Sound the controversy bells! Politics, economics, and real estate ahead!

Except—wait a second. What is this odd intersection of liberal economic arguments and Trump’s tax proposal? Something strange is afoot.

The Trump tax plan would in many ways level the playing field between renters and homeowners, something that liberal economists have been pushing for decades. Of course, that’s not necessarily good news for homeowners, investors, and the real estate industry at large. Look no further than the National Association of Realtors spending $10.2 million in the first quarter this year, lobbying Congress against proposals like Trump’s. (That lobbying budget was second only to the U.S. Chamber of Commerce for a single organization.)

And what’s this about a depressive effect on home values, particularly in pricey cities like San Francisco and New York? What’s going on here?

Let’s take a deep dive into some of the weirder implications of Trump’s tax plan for homeowners and real estate investors. You may or may not like what you find, but you’ll probably be surprised by it.

25 Million Americans Will “Lose” the Mortgage Interest Deduction

The Trump plan calls for doubling the standard deduction, which means that millions more Americans will use that rather than itemizing their deductions.

In fact, that puts it lightly. Currently, 33 million U.S. households (30%) itemize their deductions, taking advantage of the mortgage interest deduction. Under Trump’s plan, Trulia estimates that number would drop to 8 million households (only 5% of taxpayers).

So, for 25 million Americans, the mortgage interest deduction becomes obsolete and irrelevant.

Mark Zandi, chief economist for Moody’s Analytics, argues that Trump’s plan “is a backdoor way of rendering the mortgage interest deduction close to worthless.”

Still, that doesn’t mean that homeowners are paying more taxes. It merely levels the playing field between the average renter and the average homeowner. But we’re getting ahead of ourselves; more on that later.

The mortgage interest deduction isn’t the only casualty of the Trump tax plan for homeowners and real estate investors.


Related: If My Income Phases Me Out of Real Estate Tax Benefits, Should I Stunt My Growth Plans?

State & Local Taxes No Longer Deductible

Under Trump’s tax plan, state and local income taxes and property taxes would no longer be tax-deductible.

That’s more bad news for itemizers, especially for residents in high-tax states. (If they haven’t fled yet, they might start considering it now!) But once again, the larger standard deduction will push more Americans to use that rather than itemizing. Thus, the loss of these deductions would only hurt those wealthiest 5% of taxpayers still itemizing their deductions—another point somehow scored for liberal economists.

So once again, most renters and homeowners would find themselves having access to the same tax benefits, simplifying tax returns and leveling the field more.

Are Simpler Tax Returns Better?

Well, there’s a trick question if I’ve ever heard one. That doesn’t mean we can’t turn it over in our hands a few times, though.

Itemizing deductions makes for much longer, more complicated tax returns. They mean more paperwork, more receipts, more work in preparing your return, a higher likelihood of making a mistake. They also mean you’re more likely to need to hire an accountant.

And, of course, there’s a lot more there to trigger an audit.

More middle-class earners could knock out their own tax returns on a Saturday morning, rather than pay an accountant to do it for them. Bad news for accountants, good news for the rest of us.

With that said, there are some good reasons why we have such a complex deduction system. They serve as incentives for behavior we want to encourage in our economy. That’s how the mortgage interest deduction came about—as an incentive to push more Americans to become homeowners.

But do we even want more homeowners?

The Macroeconomic Argument Against Homeownership

For decades, even centuries, there has been an unquestioned assumption that homeownership is better than renting. People hold these beliefs vehemently—look no further than the comments on an article about the benefits of renting over homeownership.

But more Americans are turning their backs on homeownership, with homeownership rates at 50-year lows. And there is strong scientific evidence that regionally, homeownership rates are actually linked to unemployment rates.

Why? Many reasons, which are beyond the scope of this article, but much of the argument comes down to workforce mobility and economic fluidity. On a macroeconomic level, you want to match workers and employers based on maximum skill match, not based on what happens to be available within a half-hour radius of where a person is permanently affixed.

Homeowners also tend toward a “NIMBY”—Not In My Backyard—mentality that can block more rational zoning measures and urban planning. There’s also evidence linking homeownership with longer commutes, higher congestion, and more fossil fuel usage.

Liberals also condemn the widening wealth gap between homeowners and renters (more on that momentarily).

But the point is that U.S. politics have been dominated by the view that homeownership is worth encouraging. It’s popular, it’s mainstream, and on the individual level, there are pronounced benefits.

This prevailing populist approach is how the mortgage interest deduction and the property tax deduction came about. Not everyone is so taken with them, however.


The Liberal Argument for a More Level Field

The most recent Federal Reserve data hasn’t been released yet, but economists estimate that it will show the average net worth of U.S. homeowners ($225,000) will be 45 times higher than that of renters ($5,000).

Related: What Real Estate Investors Can Do Now to Prep for Trump’s New Tax Plan

Liberals don’t like to see discrepancies like that. It makes them ask questions like, “Why do our fiscal policies offer tax advantages to already-advantaged groups like homeowners?”

And liberal economists? They hate the mortgage interest deduction. They assert that it disproportionately rewards the wealthy, providing no benefits to the poor at all.

Then there’s the tax money that liberal economists would rather see collected by the federal government. It’s estimated that the mortgage interest deduction will leave $63.6 billion in the wallets of homeowners rather than Uncle Sam this year.

So, what happens if you double the standard deduction? As outlined above, most homeowners and renters would receive the same tax deduction—except the wealthiest Americans would still see outsize benefits from the deduction. Cue the liberal outrage.

How wealthy would you have to be to benefit from the mortgage interest deduction? Under Trump’s plan, it would take a mortgage of at least $608,000. That’s nearly three times higher than the median home price in the US.

Liberals may not be happy that the deduction still exists, but they like that fewer homeowners would receive tax benefits not available to lower-income Americans.

And it gets better for them: Housing becomes more affordable.

Economists Estimate Trump’s Plan Would Cause Home Values to Drop

Moody’s Analytics have forecast a 4% drop nationwide for home values and even more in high-price cities. The National Association of Realtors is even more concerned, estimating a 10% average drop in home values.

That’s music to the ears of progressive proponents of affordable housing (at least until their own home equity drops).

For homeowners, real estate investors and the broader real estate industry? Not quite so musical. More akin to a loud belch in church.

Still, it raises some important questions about what is “normal” home pricing. Were home values “normal” after the housing crash in 2011? Are they “normal” today? Maybe at some point in between, based on some arbitrary wage/home price ratio?

You’ll get a different answer from an affordable housing activist in Queens than you will from a businesswoman on the Upper East Side. In other words, it’s more a matter of political opinion and your existing housing status than it is an easy consensus for economists.

So Wait, Are These Tax Changes Good or Bad?

Likewise, plan on different answers from, well, just about everyone.

But it’s worth mentioning that Trump’s tax “plan” reads more like a wish list—you better believe that Congress will have their own agenda and the final proposed bill will look very, very different. There are plenty of politicians across the political spectrum eager to start crossing through and replacing line items.

I believe that taxes can and should be used to sculpt behavior among a population. Governments should offer deductions and tax credits for behaviors they want citizens to do more of (e.g. charitable donations, long-term investments, sustainable energy investments, etc.). They should also tax the heck out of behaviors they want citizens to do less of: smoking, eating fast food, etc.

For policy pragmatists who share that view, the question then becomes: Is homeownership a behavior to reward or not?

That, my friends, is the trillion-dollar question.

What do you think? Should we be rewarding and encouraging homeownership? What about Trump’s tax plan do you like or dislike?

Let the spittle fly!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.