As you might imagine the various realtor organizations are apoplectic over the possibility that the government will take away handouts for homeownership – specifically the mortgage interest tax deduction for large mortgages and the deductions for state and local taxes, including property taxes. You can see what the NAR has to say about it here on their tax reform Web page.
As usual it’s very self serving. Eliminating these homeownership subsidies are widely believed to be bad for business but of course the realtor organizations position it as a mom and apple pie issue. It’s all about the inherent benefits of homeownership and freedom (? ask them). However, I take a different perspective on this than other realtors. (What else is new? I also don’t believe that homeownership is the key to wealth building and I don’t think there is anything wrong with renting.) In principle, I’m firmly opposed to all forms of government subsidy – even those that help line my own pockets. And a mortgage interest deduction is fairly rare among other countries – maybe Switzerland and The Netherlands.
However, there is one significant problem with my principled opposition to these tax deductions and it’s not something you hear very much about. It’s the asymmetry argument. You see…a landlord gets to deduct all the costs of owning and maintaining their property, including mortgage interest and property taxes. It’s just like any other business and nobody is going to suggest that a business can’t deduct their expenses. Take away those deductions for homeowners and now you have an asymmetry between a landlord owning a home and a homeowner owning the home and there are unintended consequences of that.
The first consequence is that owning a home as an investment would become cheaper than owning it as a personal residence. Today the system is more or less in equilibrium based upon the current tax code. On average renting is usually the same cost as owning. However, if you change the tax code then renting would become cheaper than owning because the deductibility of those expenses is already flowing through to renters but would no longer benefit homeonwers. So more people would become renters. No big deal.
But there is a bigger issue. If I could no longer deduct my home ownership costs I would probably sell my house to my brother (or my neighbor, or a friend) as an investment and then buy his house as an investment for myself. Then we could rent from each other and all our ownership costs would be deductible. In fact, I wouldn’t be surprised if some inventive financial engineer/ lawyer came up with a public structure for facilitating this sort of arrangement – some kind of sale lease back vehicle owned by a bunch of people who want to lease their own homes.
In reality, the loss of the mortgage interest deduction may not be all that big of a deal after all. The mortgage deductibility limit being discussed is $500,000 which is actually pretty generous. It’s estimated that only 2.5% of Americans would be affected by a mortgage interest deduction limitation and it’s the wealthiest people who everyone likes to vilify anyway. So the NAR’s claims that this legislation is going to “[take] homeownership off the table for millions of middle-class families” are enormously exaggerated.
Gary Lucido is the President of Lucid Realty, the Chicago area’s full service discount real estate brokerage. If you want to keep up to date on the Chicago real estate market, get an insider’s view of the seamy underbelly of the real estate industry, or you just think he’s the next Kurt Vonnegut you can Subscribe to Getting Real by Email using the form below. Please be sure to verify your email address when you receive the verification notice.