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

by | BiggerPockets.com

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.

tax-changes

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.

sheriff-sale

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!

About Author

Brian Davis

Brian is a rental expert with a passion for house hacking! He and his partner Denise are the founders of SparkRental.com, which provides free mini-courses, webinars and other education on passive income and house hacking.

59 Comments

  1. Cindy Larsen

    Interesting article Brian.

    As a fairly new real estate investor, I’ve spent quite a bit of time understanding the tax code in order to invest in ways that minimize my taxes, and therefore maximize my ROI. So, I know from personal experience that some people will modify their behavior based on the tax laws in place at the time. I also saw this in the software industry when companies I worked for would change how managers were evaluated, and, over a remarkably short period of time, most of the managers would alter their management style to fit the new evaluation criteria.

    However, for the changes in tax law to be effective as behavior modifiers, people have to understand them clearly, and understand which behaviors will be rewarded. Most people don’t even understand that you can benefit from knowledge of the tax code: they just use turbotax, or a tax preparer, and make their decisions without researching the tax implications beforehand. As a result they get hit with taxes they didn’t expect. I got hit with Alternative minimum tax a few years ago, which I could have avoided if I’d sold the house via an installment sale. I had planned based on my knowledge of the capital gains exclusion, but had never even heard of AMT, or installment sales. Most people know less than I knew back then, and don’t know how much they don’t know. And they have busy lives, and don’t think much about taxes. And almost no one reads the IRS website. So, media hype about any new changes is more likely to alter behaviors than the details of the actual changes.

    I’ve been waiting and watching impatiently for something concrete to materialize out of all the discussion on Trumps tax plan. No doubt it will end up, after our political process, just as helpful and streamlined as obamacare did. I am glad there are people lobbying for the status quo, since I’ve invested time in understanding that. We need a landlords lobby. But, whatever the end result, I will study it, and determine the most advantageous path for investing. Hopefully, that will continue to be real estate, which is much more deterministic than the stock market.

    How the tax laws work, and what behaviors they encourage is incredibly important, since taxes are the biggest expense anyone has. I don’t like our tax system. But I believe that it is important to know as much as possible about it in order to be hurt less by it. For this upcomming set of changes, I just wish they would hurry up and decide what the changes are, so we can adjust our investing strategies to accomodate the changes. Do you have any idea of when the changes will be determined and implemented? 2017 tax year? 2018?

    My favorite tax quote: “Be wary of strong drink. it can make you shoot at tax collectors….and miss” Robert A Heinlein

    IMHO, the major differences between the IRS, and a man with a gun in a dark alley, who is demanding you give him all of your money are:
    A) If you decide to fight, to defend yourself and your livelihood, you have a much better chance against the man with the gun than you do fighting the IRS.
    B) The man with the gun can only take the money currently in your wallet. The IRS has no such limitation.

    Knowing the tax implications of your financial decisions is like having a powerful flashlight in that dark alley, or changing it into a well lit street. You still have to pay, but it becomes a toll road with known entry or exit fees.

    I really wish that the new tax changes were not currently shrouded in a political fog. I hate being a mushroom (growing in the dark on a pile of BS).

    CJ

    • Brian Davis

      Spoken after my own heart! I totally agree that anyone who wants to be successful needs to understand the “rules of the game” – and like you said, taxes are our biggest expense and therefore its rules are more important than most.
      And I totally agree we need a landlord lobby! Every other industry has one.

    • Brian Davis

      Sooner or later the mortgage interest deduction will disappear. I wouldn’t be surprised if it took a 1-2 punch though – something like this to marginalize it to only directly benefit the wealthy, then a liberal congress removing it altogether by being able to bill it as such.

  2. Kristopher Derentz

    First I don’t think Tump’s plan will get passed. He currently can’t even get the healthcare bill passed in the Senate that passed the House, and tax reform will be just as difficult if not more so.

    With that said I think there will be trade offs. The doubling of the standard deduction “might” reduce reasons for people to want to buy a house and instead rent. If this is the case and prices get correction, then it might be a great time to buy as more people will need to rent, and with more demand for renting push rental prices up. For buy and hold investors this could be a positive.

  3. Karen O.

    If the mortgage interest deduction goes away, then wouldn’t it be a good idea for homeowners to turn their primary residences into rental real estate and find a home that they can rent for themselves/
    The property owner would gain an investment property in which the mortgage interest, property taxes, management costs and other costs of upkeep would be offset against any rental income. If done right, they’d have a positive stream of income and they’d still have the benefit of possible appreciation though instead of a tax gain exclusion, they’d be able to use the 1031 exchange to delay taxation of the appreciated value.
    Currently me if I’ve oversimplified or missed something important.

    • Brian Davis

      It would depend on the market – how home prices compare to rents in that market. But theoretically, prices would lower while rents would rise, so I would agree with you that it would be better conditions for being a landlord.

  4. Tim Sabo

    I’m no tax expert, so I will simply quote David Cay Johnston from a recent article on Investopedia:

    “Trump would tax people with identical incomes very differently.

    If you are a highly paid executive, salesperson or other employee making big bucks, Trump would apply the 35% rate to you. But if you are self-employed and, like Trump, make your money through profits from so-called pass-through businesses you control, your tax rate would be just 15%. In a pass-through the business itself is not taxed, but the owner is taxed on the business’ profits.

    Anyone who now operates a business as a sole proprietor, also known as a Schedule C filer, would be a fool not to switch to forming a Limited Liability Corporation or an S Corporation unless he or she made so little the tax rate would be 10% percent or 15%.

    This 20-percentage-point difference between highly paid workers taxed at 35% and highly profitable individual businesses taxed at 15% makes exactly zero economic sense.

    Trump would create an unlevel playing field, one that gives the self-employed a tax savings of 20 cents on the dollar compared to someone making the same income as an employee.”

    Seems to me that these changes would have a direct impact on many small real estate investors currently operating as a sole proprietor. Say what you will, but Trump’s plan is geared to giving tax breaks or cuts to those who are already wealthy and no changes to lower income brackets. Along with the cuts he has proposed in his 2018 budget to social services like MedicAID, MediCare, and other programs that help the poor, Trump is trying to redesign the financial system to benefit wealthy Americans only, My guess is that this will buy Republican more votes in Congress, and eventually they will have the judiciary controlled by Republicans: in that time and space, any law they pass will no longer be subject to the checks-and-balance system and Republicans would be able to pass any law they wanted without fear of a court turnover.

    While watching what MAY happen to the tax code, the social network for the poor, the health care system, or other government programs, we may-if this administration continues-soon be watching Congress pass laws giving them the right to drain our bank accounts or do anything else they like.

    While I am not an alarmist, and we do need reform in every area of the federal government, this administration has demonstrated they can not be trusted by Americans to protect American interests: I surely don’t want to give them carte blanche to change anything financial-even taxes.

    I don’t trust them, and while I don’t want to give money I earn over to the government for any reason, as a citizen, as a human being, and as a Christian man I believe we have an obligation to help those in need get on their feet. Jesus healed people, then left to to live their own lives. We need to give folks a hand up, get them on their feet, and send them on their way. That doesn’t mean you give the wealthy more cuts: they benefit now from every tax loophole there is!

    Ever heard of a poor man benefiting from a tax loophole?

    • Julie Rogers

      I want to give your comment some thought, but since you included medicare in the things trump is cutting, which I understand will not be changed at all, I wonder how much of the rest of you comment is just smoke.

    • Heather Angelo

      1. RE: Anyone who now operates a business as a sole proprietor, also known as a Schedule C filer, would be a fool not to switch to forming a Limited Liability Corporation or an S Corporation unless he or she made so little the tax rate would be 10% percent or 15%.

      This 20-percentage-point difference between highly paid workers taxed at 35% and highly profitable individual businesses taxed at 15% makes exactly zero economic sense.

      Feel free to verify all of the following:
      According to SBA, Small businesses make up:
      99.7 percent of U.S. employer firms,
      64 percent of net new private-sector jobs,
      49.2 percent of private-sector employment,
      42.9 percent of private-sector payroll,
      46 percent of private-sector output,
      43 percent of high-tech employment,
      98 percent of firms exporting goods,
      and 33 percent of exporting value

      By making it tax-advantageous to start a business, the proposed tax plan directly provides incentives designed to increase employment in the US.

      2. RE: Along with the cuts he has proposed in his 2018 budget to social services like MedicAID, MediCare, and other programs that help the poor, Trump is trying to redesign the financial system to benefit wealthy Americans only

      As stated in the article, the tax code is designed to incentivize desired behavior, such as charitable contributions, which are among the few deductions proposed to stay as they are. Medicaid and Medicare, as centrally controlled/administered bureaucracies, are rife with fraud and inefficiency (some would say inefficiency such that would constitute fraud). Case in point, according to Medicare’s 2015 annual report, the private insurance-based Affordable Care Act — sometimes called “Obamacare” — will add more than a quarter of a trillion dollars to the already very high administrative costs of U.S. health care through 2022. Nearly two-thirds of this new overhead — $172.2 billion — will go for increased private insurers’ administrative costs and profits. Much of their revenue comes from the government that pays hundreds of billions annually in premiums for private ‘Medicare Advantage’ plans, Medicaid managed care plans, and much of the premiums for the private plans bought on [ACA] insurance exchanges. Much of this money is wasted; Anthem and Cigna have overhead that’s nearly tenfold higher than traditional Medicare.” By decreasing Medicaid and Medicare (which frankly is an intellectually dishonest statement since it merely undoes the ACA increases) it should go back to being used for those who truly need the assistance, rather than to force single-payer and socialized medicine in the US.

      3. RE: While I am not an alarmist

      Mmm-kay

      4. RE: while I don’t want to give money I earn over to the government for any reason, as a citizen, as a human being, and as a Christian man I believe we have an obligation to help those in need get on their feet. Jesus healed people, then left to to live their own lives. We need to give folks a hand up, get them on their feet, and send them on their way. That doesn’t mean you give the wealthy more cuts: they benefit now from every tax loophole there is!

      Render unto Caesar…
      It is our moral obligation as Christians to help the poor, feed the hungry, and care for the sick. Paying taxes does not somehow absolve us of this obligation. We have no way to require or ensure our taxes are used for their stated/intended purposes, and even if the government pinky-promises they’ll do it this time (think SS, infrastructure, ending the war, etc.), we are still obligated to Voluntarily help the sick, the poor and the under-served. Taxes are not voluntary, and gleefully demanding to pay more in the name of helping the poor is naive and unfortunately does not help anyone except government and the lobbyists.

      • Sergey Tkachev

        Heather, thank you for the thorough comment/reply – fully agree with you. It’s amazing how people can throw misinformation around conveniently avoiding true facts. Thanks for saving me time, I would have had similar comments in my response 🙂

  5. Mengzhi Wu

    This article looked like it took some time to write. So I don’t know if I’m missing something here but this increased standard deduction just means there’s less additional incentive to buy a primary home due to decreased mortgage interest which should in turn make renting more preferable because you can always deduct interest paid to banks on investment properties from rental income unless you’re one of those that report a loss and are subject to AMT or something like that. These rules may lower values which is bad for flipping but should encourage more people to rent which should be good for buy and hold.

    This is good overall investors because it’s a tax cut, whether or not that’s right for the country or those less fortunate now and in the future is a completely different topic.

    • Brian Davis

      I agree, it would be a good thing for buy-and-hold investors who haven’t yet purchased, because theoretically it would push prices down and rents up. Existing landlords would suffer equity losses, but would benefit from the higher rents. Homeowners and flippers would not fare as well.
      It will be interesting to see what happens…

  6. Chris Ayers

    I agree with a lot of the assumptions the article makes.

    Since most people will take the standard deduction and miss out on mortgage interest, then this might entice more people to rent instead of buy which increases demand. Sure we’ll all take a small equity hit at first, but for those playing the long game its interesting to see how it plays out.

    Like someone else mentioned, this is just a proposal and I’m sure by the time Congress gets done with it, it will be just as long as the current tax code.

  7. Donald Jeune

    So in theory, this should also benefit a house hacker also, correct ? I recently plan on buying a multi unit home in Brooklyn. Live in one unit and rent out the others. The increasing rent would help the mortgage payments. Though i’m a bit concerned that I may be underwater if there is a price correction smh.

  8. Hunter Chen

    Being of a left-leaning persuasion, I feel the need to comment on the difference between the effects of a “flat” tax system and a “progressive” one.

    By increasing the standard deduction, the system is more aligned with a flat system. However, the proposal leaves the itemized deduction for the wealthiest portion of the population, which actually pushes this system to a regressive one, in which the wealthiest pays proportionally less than the poor. This proposal in essence would penalize the upper middle-class family by reducing their potential deductions, at the benefit of simplifying the tax reporting process for 25% of the taxpayers. Why would we want to create a bigger gap along the income distribution between the top 1% and everyone else?

    On the other hand, a progressive tax system would require those of us who have benefited greatly from our tenants to pay a proportionally higher tax rate to benefit the infrastructures that all of us can reap: education, healthcare, science, etc. Why can’t we have a system that provides everyone with a fair chance at upward mobility?

    • Jared Davis

      To offer an opposing view… As discussed earlier, you get more of what you incentivise, and less of what you tax. The reason you don’t want to tax the wealthy (in business or real estate), is because they drive the economy and jobs. You want them to have all the incentive to continue growing, investing and creating more jobs. We should incentivise everyone to do the same. This is fair and stimulating. Who doesn’t need a little stimulation, eh? 🙂

      • Paul Doherty

        Stimulating the wealthy doesn’t create jobs or new businesses, demand does. And demand comes from a healthy and growing middle class who have disposable income. You don’t there by creating tax policies that concentrate more and more wealth into the rich’s hands.

        • Sergey Tkachev

          You’re missing an important economic point/principle here – any money that is left in the hands of the wealthy (not taxed) will be used by them to invest, create businesses, opportunities, etc. If that same money had gone to the government, it would have only fractional economic impact because of the inefficiencies and bureaucratic nature of the government. The wealthy don’t just sit on money – they invest it, spend it, hire people (create jobs), etc.

          So money left in the hands of the wealthy DOES create jobs and new business. I can explain to you all day long about the intricacies of this.

        • Richard Porter

          First, Paul is correct [check the statistics not your beliefs].
          I want to reply to Sergey and the others who mistakenly hold the belief that “trickle down” economics creates jobs etc., etc… Regan was ABSOLUTELY WRONG, and he knew it was bull when he started this toxic myth – Ask a plumber what “trickles down.”
          Please “can” all these beliefs and check the numbers [you are investors after all]. There is NO statistical evidence that “the wealthy create jobs” crap is, or ever has been true, it is just the bumper sticker slogans that those who have drunk the cool aide keep repeating. Actually DO the research… yourself, and STOP listening to FOX news! You will discover that the non partisan, un-doctored stats overwhelmingly show that concentrating the wealth anywhere brings the economy down. Putting spendable dollars in the hands of those who will spend it is what drives our economy.
          In fact, it was the infrastructure jobs that jump started the economy after WWII that were the seeds that created the “good old days” that everyone seems to want to get back to [and we are STILL benefiting from them even though they are in as bad a shape as they are].
          To put it into political tones, there is truth in the saying: “IF you want to live like a Republican, govern like a Democrat.” [Again, check the graphs in real dollars as to who was president under the growing surpluses and growing deficits through out our country’s history. Republicans, I know reality sucks!]
          Unilateral benefit to the top 1% at the expense of everyone else in whatever form is wrong, and will never work long term.
          Ho, and if you want to curb all that “waste and fraud,” work on that, don’t throw the baby out with the bath water!
          I guess you can tell I am sick and tired of this politics and policies of this country being run off of “views” and “beliefs” rather than numbers that have not been manipulated and distorted in order to try and prove the down is up and black is white… Don’t get me started on Climate Change. 😉

    • Sergey Tkachev

      All of the “benefits” and “infrastructure” you describe that we supposedly receive from paying the “fair share” are hardly visible because most of the money is wasted in the system. And the “ROI”, if you can call it that, is incredibly low compared to if that money were utilized in the private sector.

      Now here is a better question – why are you promoting the punishment of those who are productive in our society and incentivizing the less productive to continue being less productive? I know this probably sounds harsh if you politicize it, but that’s the problem – people don’t want to face the reality but that is what you would be doing, promoting less productive habits and penalizing productivity. This isn’t a political statement I’m making – I’m saying it from experience, coming from a country that did this for decades only to come to a crumbling end. I don’t want this great country to see the same fate.

      • Ruth Lyons

        Thanks for making these points, Sergey. Government is inefficient. We all know that in our heart of hearts and from our experiences if we take an honest look at how government gets corrupted by self-interests.

        Free markets work best. Yes, there are inefficiencies in a free market, but those get worked out if the government stays out of it. Famous economist Milton Friedman explains why in his essay: “Why Government Is the Problem”. It’s not a perspective shared by the masses because they don’t take the time to understand it, but it is enlightening. And history proves it is true. I quote, “If a private enterprise is a failure, it closes down. If a government program fails, it is expanded. I challenge you to find an exception.”

        • Gloria Almendares on

          I agree 100% with what Sergey and Ruth are saying. If you think more taxes and more government is the answer, I have some real estate to sell you in the middle of the “swamp”! The problem here is that too many people are influenced by the “fake news” and fail to find out the facts. Fact No. 1: when Reagan was President he lowered the taxes for everyone, including the Rich. Guess what happened, more jobs were created, thus the gov. had more tax revenues, because instead of collecting unemployment benefits, people actually worked for a living. Read your history folks. History does repeat itself, don’t listen to the liberal media which only has one agenda in mind: “to make sure Trump fails, even if it hurts the working class people”. More gov. does not equal more jobs. On the contrary, it takes away from the wealthy and gives more “freebies” to the welfare recipients. Have you ever heard of the poorest of the poor creating more jobs for the people? Wake up and read your history. The wealthy create JOBS not the poor! By giving people a means of making a living, then you start to eliminate poverty. We will always have the sick, elderly and young to care for, that is our moral obligation as a human being. No one is stopping you from caring for the less fortunate. Do not expect the gov. to take care of our poor, they have done a terrible job, even though our taxes have gone up, we see more homeless today than in the last 25 years!

  9. Cricket Jackson

    Doubling the standard deduction is a better benefit to most people (that own a single home) than the mortgage interest deduction. If this was the only reason people were incentivized to be homeowners, then we should all be happy that home prices will go down and rent rates will go up.

    Does it create a larger gap between the wealthy and those who aren’t? Sure, but it also benefits a large portion of the middle class, homeowner and renter alike with bigger tax savings than they currently see.

    How people handle this extra savings will all come down to personal priorities, and likely will mean people wasting more money, while the rest of us continue to invest in solid assets with rising rent rates 🙂

    • Nicollette Roth

      This was my thought too: doubling the standard deduction will probably be a greater deduction than those who were itemizing their mortgage interest.

      Especially for those who have purchased while interest rates have been super low, and thus don’t have much mortgage interest to claim.

  10. Mike Dymski

    Thanks for a good article.

    It makes them ask questions like, “Why do our fiscal policies offer tax advantages to already-advantaged groups like homeowners?”

    There are not tax advantaged groups and tax disadvantaged groups. There is only one tax code that applies to everyone.

    • Paul Doherty

      Having one as code doesn’t mean the particulars of that tax code don’t benefit people in certain income strata, or with certain situations. It’s quite possible to have advantages people in the tax code, whose benefits are large due to their circumstances and how those align with the tax code.

      • Cindy Larsen

        Paul,
        You seem to be saying that either
        1) you dont think the tax code should incentivise any set of behaviors. THe only thing that would do that would be a flat tax: everybody gets taxed the same percentage of their income. That would be great for investors, and therefore for the economy, but would really hurt the poor and lower middle class. Also, the odd of it happening are effectively zero
        OR
        2) You want to have the tax code incentivise a particular set of people or income group (the middle class) rather that incentivise a set of behaviors. I don’t like the tax code either, but it already taxes people who make more money at higher rates. What it also does is encourage people to do things that align with the tax code, by taxing them less if they do that. Anyone can choose to reduce their taxes by changing whether or not they become investors, and how they invest.

        I’m middle class. I’ve been taxed very heavily my entire life until I got smart and figured out that I could find ways to get taxed less. I bought a house, and itimized. I invested in retirement funds, which were invested in the stock market, and had my money grow tax free (and then drop with each crash, and build up again). I decided to become a real estate investor to take advantage of the lower taxes/greater returns availabe there. I decide to start a small side business (tutoring) so I could creat a solo 401k, move retire funds there, and invest in real estate instead of the stock market.

        Anyone can learn to do this if they have the intelligence and determination to do so. The information is freely available, and, on biggerpockets, people are willing to help other people learn.

        Yes, the middle class is heavily taxed, unless they figure out how to change their behaviors to reduce their taxes and increase their wealth: the same thing the rich do, using the same set of rules in the tax code. Before I realized this was possible I always felt like a victim of an unfair tax system. Now I feel more like I can choose how much less I get taxed, by what I choose to do. There are rich people here on bigger pockets that got rich because they changed their behaviors to do the things the tax code encourages. Work smarter, not harder.

        As others have pointed out, having a tax code that incentivises investing helps the economy, which helps absolutely everybody.

        • Gloria Almendares on

          Agree 100%. We all have the capability of learning what is advantageous tax-wise, and what isn’t. It’s not the rich folks fault that some people are lazy and ignorant, and choose to blame the gov. for everything. Those that copy the rich, and do what they do, will also get rich. Those that want “something for nothing”, will never get ahead. I believe everyone should pay their fair share of taxes, expect for those earning below the poverty level.
          15% of $50,000/yr is $7,500. 15% of $1,000,000,000 is $150,000,000.
          Is that fair?

  11. Julie Rogers

    Great article.
    Thanks for spending your time to inform us.

    Reality, USA is spending way more than the country makes. Only two ways out of that, increase income, cut spending.

    From what I have seen, that is exactly what Trump is trying to do.

    I read about deficits on the internet, hyper inflation was one of the results. The articles went on the state that this happens to all countries with deficits, except, for some strange reason it is not what is happening to America?

    Better do something now, or it is going to be very bad!

    I vote do exactly what Trump is wanting to do.

    You definitely would not want what I would do.

  12. Donovan H.

    Hmmm … seems as if the author doesn’t know any liberals. As an independent (small “i”), I often speak to people on both sides of the left-right spectrum (wife’s family liberal, my family conservative). I have yet to meet a liberal who was against home ownership. While they want to see less inequality, most don’t want to see the mortgage interest deductions gone completely. Most want to see it progressively phased out above certain income levels.
    Overall, I’d like to see a more balanced article with more facts and less “fake news” as the conservatives would call it. Talk to BOTH sides before writing such an article.

    • Brian Davis

      Donovan there is no fake news in the article. Every fact is cited, and reputably so. I respect that you might disagree with my views, or my conclusions, but there are no false facts in the article above.

  13. You refer to liberals quite a bit. But it seems to me this tax plan is not from the liberals but is from the conservatives. If the conservatives vote against it then it can not pass. So there are no worries.

  14. Christopher Neeson

    I won’t get too in depth but I can say that getting rid of the charitable contribution deductions would greatly help our economy.

    Too many people use charitable contribution in ways that don’t necessarily give back to our nation.

    I’m ok with eliminating charitable contributions before anything else is done.

    Secondly, I can see how eliminating interest deductions on homes would benefit investors as well as home buyers.

    You already only get your primary living property as a deduction so anyone who invests in real estate really isn’t seeing much of a gain in this arena anyway.

    The nation is due for a big real estate price correction. I can see balloon markets taking a hit. Any place that has units over $30,000 a piece would probably get hit the hardest in the next housing correction.

    You really have to plan for this as an investor and should not be risking in ballooned markets.

    Trumps tax plan looks favorable to the middle class Americans. He seems to be attempting to find well rounded fixes for not only our huge national debt , but also fixes that will still keep businesses coming in and help create more work.

    The greatest thing about the United States is there is always enough work to get ahead and to feed the family. People get picky and they get spoiled though.

    You can buy a home and raise a family in middle America with $30,000 a year per household. If you start venturing east or west that tends to change.

    I’m just hoping I’m ready for the next real estate market correction.

  15. Ken Winter

    Although your article was focusing on the home interest deduction and its impact, you did touch on the larger question when you wrote, “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.”

    Taxes have always been used as an instrument of social change. That is NOT necessarily a good thing. But it might be the only way. The tax code is nearly 75,000 pages. It didn’t start out that way. It got complicated because the easiest way to accomplish any change is through manipulating taxes. It is in the best interest of the country to have more home ownership (whether owner occupied or rented) because housing starts and renovations stimulate the economy. I wish there were other ways to provide incentives besides the tax code.

    The easiest example to understand this dilemma is with charity. It is in the best interest of the country for charity to be provided by private individuals rather than government handouts that result in taxes. But left on their own without a tax incentive, private donations would certainly drop. What is the solution? If I could come up with a better way, I’d be headed to Stockholm to pick up my Nobel Prize in Economics.

    • Cindy Larsen

      John,

      I wouldn’t put anything past the politicians. The people who control most of the politicians also control the media, and can spin almost anything. As for social security, go take a look at this:
      https://www.ssa.gov/oact/trsum/
      The bottom line is that 17 years from now , all social security payments will be reduced by 25% because social security won’t have the money to pay more. That is unless the government bails out the social security system by either increasing fica taxes, or increasing the deficit. in any case, I’m not counting on scoical security to fund my retirement.

  16. Ron Gosling

    The article really doesn’t say much of value and the truth only kicks in towards the end. First, the President’s proposal has very little to do with reality. Second, Congress writes tax bills, not the President. The Republicans run Congress. The vested interest groups will write the bills and pass them to the Reps. and special committees. Third, President Trump has only a few vested points in a tax bill. He wants to repatriate the trillions of dollars American multinational companies half parked outside the US, he wants to lower the business tax rate and finally, if he can do it without a fight, lower the personal tax rates. He will get zero cooperation from the Dems and probably even less from the GOP. I would bet there are no changes of significance in the next budget and the status quo stays intact for the next four or eight years.

  17. Ruth Lyons

    Interesting article and great comments.
    Thanks to all for contributing your thoughts. The one thing that came up in this thread — the call for eliminating the charity giving deduction — gets under my skin. That would be a tragedy, the scope of which wouldn’t even be understood until years after the government has wasted all the money they collected from the increase in taxes that would result.

    Charitable giving allows individual Americans to choose what programs and causes we want to personally support. Do you really want government bureaucrats to tax that money and choose the causes for you? Are you really that anxious to give up the freedom to choose where you want your charity dollars to go?

    We don’t need higher taxes and more government intervention in our lives — we can and should choose where to donate our money. If you have a problem with some of the charities, don’t give to them. If you think money is being wasted by a charity here or there, file a complaint and get your assertion investigated. Start a non-profit charitable organization for what you feel strongly about…

    But don’t support a money grab by the government to choose for us! Here’s just one example: We have a homeless resource center at which I’ve volunteered for years. All the volunteers are really helping people because we chose where we want to give our time, money and talents. We care and we give from our hearts. Our homeless friends get loving care and support when they visit — so much more than a meal. Now imagine that we volunteers are no longer there and hourly government employees are now staffing the shifts. It’s no longer about getting help but competing for handouts. And what about all the community support local churches give to the needy?

    Be careful what you support and especially what you vote for. Often the alternative that results is worse than what you had before. There are problems with any system but bigger government is not the answer! Eliminating the charitable deduction is a vote for higher taxes and a vote against personal liberty. Our leaders don’t know how to balance a budget — why would you want to give them more money to waste? Do you really think they can do a better job managing our charitable dollars than we can by choosing what programs we want to support?

  18. Dan Heuschele

    If I could make a single tax code change it would eliminate the interest deduction on second homes. People use it for RVs, vacation escape homes, etc. Why should anyone get a tax benefit for owning a second home? Of course congress is a big user of the second home deduction (home district and Washington DC), but I think there could be other ways to handle second homes associated with work.

    I do not think removing the interest deduction on second homes will result in any giant revenue increase for the government but it would reduce incentive for the rich to be wasteful and own 2 homes both subsidized by interest rate write off (to $1.1M).

    I found the article interesting. I do believe increasing the personal deduction would result in overall lower taxes but that will either need to have associated cuts in spending or it will increase the debt. Everyone thinks cuts in spending are good until the cuts are against what affects you (National Parks, Medicaid, defense spending, EPA, National security, etc.).

  19. Joshua Howaniec

    Brian, I love this article! Keep up the good controversial work. Thumbs up!

    I don’t tend to trust the “pros” in the speculative realm. They are often wrong and when they are right they don’t know why they got lucky. I’m thinking of Brexit when Britain’s economy was supposed to collapse (it’s doing fine) and of the terrible recession we were supposed to go into when Trump got elected (economy is going gangbusters).

    Deciding how the market will react to this new law is damn near impossible. While we cannot change the laws one thing I am sure of is that we have a special community here that will learn to survive and thrive in every market that is thrown at us.

    To the survivors

  20. Mindy Zimmerman

    This article just proves what I love about BP. A politically charged topic and all the comments are thoughtful – not petty attacks on one side or the other.

    In the end I think little will change, however it’s still interesting to debate the possible outcomes. It never hurts to prepare for the worst even if you hope for the best.

  21. Tatyana M.

    Just thinking. Wouldn’t increased standard deduction increase people’s chances to save up for down payment? I honestly don’t know anyone who thinks about buying primary residence based on mortgage tax deduction – availability of funds for down payment, desire to settle down, etc. Taxes, not so much.
    In that retrespecticve, the tax plan might increase incentive to buy a home.

  22. Jeff A.

    It seems everyone want a specific tax code that will put more dollars in their own pocket. If the tax code was used to create a benefit to hire people and increase pay, and benefits.
    The result would be….
    All ships would raise.

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