$$$: What’s the impact of lower mortgage interest deductions on house prices?

Worst case answer: About $50,000.

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First, a couple of disclaimers …

1) I’m not a tax accountant or lawyer … so, nothing I say should be construed to be financial or tax advice.

2) Philosophically, I’ve always thought the income tax deduction for mortgage interest should be shelved.

Note: That philosophical principle certainly never stopped me from claiming my allowed tax deductions for my home mortgages.

Mortgae - Interest Rate GRAPH

OK, let’s get started…

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Some background…

Trump’s Tax Cuts and Jobs Act of 2017 (TCJA) made a couple of significant changes to cap deductions that homeowners can take on their income taxes.

The most publicized (and controversial) change was capping the allowable deduction for State and Local Taxes (SALT) to $10,000.

The 2nd, less publicized change, was to limit the allowable deduction for home mortgage interest to interest paid on mortgages totaling $750,000 … a cut from $1 million.

Technical note: There are complicators like grandfathering of existing loans, mortgage interest on 2nd homes and home equity loans that we’ll ignore to keep things simple.

Today, I just want to focus on one aspect of the change in the mortgage interest deduction cap … specifically, how it impacts the market value (aka. “selling price” of existing homes.

Note: This is where things get personal since I’ve got a horse in this race …I’m currently in the process of  trying to sell a home.

OK, let’s work the numbers…

The worst case is that a home buyer / home owner loses the the income tax deduction for the interest paid on $250,000 of his mortgage … the difference between the old cap ($1 million) and the new cap ($750,000).

Note: Mortgage balances less than $750,000 aren’t effected … and any mortgage amount over $1 million isn’t effected since the excess over $1 million wasn’t getting the tax deduction before.

Assuming a 4% mortgage interest rate, the annual interest on $250,000 is $10,000.

That’s the amount of the lost tax deduction.

Assuming a 25% marginal tax rate, that translates to $2,500 in higher annual income taxes … or a tad higher than $200 per month.

Let’s pretend that a home buyer is budget constrained so that the additional income taxes reduce his affordable mortgage payment.

That gets us to the basic question:

How much less house can a budget-constrained buyer afford if they’re stuck paying an additional $200 per month in added income taxes?

In a prior post we looked asked: How much house can you buy for $1,000 per month?

We concluded that these days — with conventional  mortgage rates running about 4% — a $1,000 monthly Principle & Interest (P&I) payment gets you a 30-year loan of about $210,000.

Assuming a 10% downpayment, that buys  $235,000 of house value.

OK, one more step…

If $1,000 per month is equivalent to $235,000 in house value, how much is $200 per month worth.

Simple: 20% of $235,000, or about $47,000.

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Conclusion

In a worst case scenario, that assumes that a budget-constrained buyer  is taking out a mortgage in the range of $1 million at a 4% mortgage interest rate ….

Then, to stay even, the amount that the buyers can offer to buy the house is about $50,000 less under the TCJA.

Whew!

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