In this post you will learn :

• How Trump will get rid of the Mortgage interest deduction
• How to benefit from the mortgage interest deduction with the new Trump tax plan
• What impact this will have on the real estate market

Let's take a deep dive into the mortgage deduction impact of the potential new tax plan proposed by Donald Trump^[1]. In our analysis, let's assume we have a young couple (just married) with no kids to simplify the analysis.

One key change Trump is looking to do is to increase the standard deduction:

• For single:
  • 15000$ (currently 6500$ ^[2] )
• For married filing jointly:
  • 30000$ (currently 12,600$

There are a few advantages to this change including simplifying your personal taxes. However, the chances are you will lose the mortgage interest deduction advantage, unless your mortgage interest is more than 30000$ per year. This means, at 4% interest and 20% downpayment, you would need to buy a house worth more than 940000$.

You will lose the mortgage interest deduction advantage unless your mortgage interest is more than 30000$ per year

Let's take a look how this will affect you. Most middle class families have interest mortgage less than 30k$. The mortgage interest is usually the biggest chunk of your itemization. If the standard deduction is higher than your itemization, then whether you buy or rent, you will end up with the same refund at the end of the year. Therefore, you would lose any tax advantage by deducting your mortgage interest deduction unless you can itemize it.

Mortgage example for a 650000$ house

Let's take a look at an example, imagine a family of 4 just bought this beautiful house in San Diego.

San Diego is one of the most expensive real estate market in the US. Therefore, the average middle-class family should have mortgage smaller than this example.

House price	$650,000
Down payment	$130,000
Loan	$520,000
Interest	4.0%
Interest paid 1st year	$20,800

20800$ is below the standard deduction for a married couple filing jointly. Therefore, they would not be able to use the tax deduction unless you can easily find another 10000$ to deduct. In this case, you would be better off taking the standard deduction and might weight into your decision of renting vs buying.

In fact, you would need to buy a house of 940000$ before you start getting the benefit of the mortgage interest deduction.

House price	$940,000
Down payment	$188,000
Loan	$752,000
Interest	4.0%
Interest paid 1st year	$30,080

This means the value of your home will likely decrease (since there might be less demand for it), unless your home is worth more than $940,000.

Impact on your taxes

In theory, getting rid of the mortgage interest deduction itself is a not a bad thing from an economic point of view. It gets the government out of the business of subsidizing home-ownership. However, removing the mortgage interest deduction advantage unless you own a 1M$+ house sounds unfair.

Also if you expect that the child-care deduction to affect your standard deduction, be warned. This will not affect the standard deduction. Because, Trump's tax plan proposes that the child-care deduction to an above-the line deduction^[3] and not part of your itemized items.

Impact on the real estate market

This change will definitely affect the real estate market. It might increase the demand for rental, since more people might decide to rent instead of buying (to take advantage of the mortgage interest deduction). People will think twice before buying a house. They might defer the purchase to either buy a bigger house by making sure the mortgage interest deduction is bigger than their itemized deduction.

Is this fair?

This change will affect home-ownership of the middle class disproportionally. For example, if a family has a 2M$ mortgage, they will still get a huge mortgage interest rate deduction advantage (about ~60000$ at 4% loan). But this change will affect most first-time home owner. Why would someone buy a house if you don't get the tax deduction for the mortgage interest?

Is this change going to affect you?
Do you believe this is a good thing for the economy?
Do you think this is a fair policy ?

Reference:

---

1. IRS Standard deductions ↩︎

2. Donald trump tax plan ↩︎

3. Republican tax reform proposal ↩︎