When it comes to the real estate industry and politics, its rare that the industry ends up on the losing side of a debate no matter the party in charge. Its lobbying prowess at the local, state and federal level is renowned, and its one of many reasons that the tax breaks for the industry have been off-limits during contentious budget debates.
So it was somewhat surprising to see the real estate industry take it on the chin when state GOP leaders unveiled their consensus tax plan this week. The legislation would cap the itemized deductions for mortgage interest and property taxes at $20,000.
The cap would be one of the first of its kind in states that offer such deductions, according to the N.C. Association of Realtors.
The industry, as you would expect, has been raising alarms about the cap, saying it will, among other things, harm property values at a time when the market is just starting to recover.
Getting a firm handle on exactly how many homeowners in the state would exceed the cap is difficult because deductions will vary depending on the size and interest rate of the mortgage, the value of a house and the local property tax rate.
People have to look at their own tax bill and their own mortgage statement to figure that out, said Mark Zimmerman, a Triangle real estate agent and chairman of the legislative committee for the N.C. Association of Realtors.
But in general, those affected by the cap would be upper middle class and wealthy homeowners, particularly those that live in municipalities with high property tax rates.
A couple of scenarios
To help get a sense of where different types of homeowners would fall, I asked Todd Barbour, a mortgage loan officer for AES Lending in Cary, to run a couple of loan scenarios through his companys internal system. These are estimates of potential mortgage interest and property tax deductions for hypothetical borrowers meaning do your own math or have a mortgage broker do it for you.
• A Raleigh homeowner who takes out a $200,000 fixed-rate 30-year mortgage at 4 percent on a home valued at $250,000 would, in year one, pay about $7,800 in interest and about $2,500 in property taxes meaning he or she would be comfortably below the $20,000 cap.
• A Raleigh homeowner who takes out a $417,000 fixed-rate 30-year mortgage at 4 percent on a home valued at $600,000 home would, in year one, pay about $16,500 in interest and about $6,000 in property taxes putting him or her $2,500 over the cap.
Supporters of the GOP tax plan point out that the cap will largely hit the wealthy, and they also note that such homeowners will receive significant tax relief from other aspects of the legislation, particularly its reduction in the personal income tax rate.
But its also true that the number of homeowners who find themselves above the cap will increase in the future as mortgage rates and property tax rates rise. Property taxes in many areas are likely to rise, in part because the state and federal funds available to local governments are expected to decline as budgets tighten.
Mortgage rates, which have been at historically low levels in recent years, are likely to be even more of a factor in increasing the revenue raised by the cap.
In the first scenario above, if a homeowner took out a $200,000 fixed-rate mortgage at 7 percent, he or she would, in year one, pay nearly $14,000 in interest, putting him or her much closer to hitting the cap after factoring in property taxes.
Impact on home values?
The long-term effect of the cap on the states various housing markets remains to be seen. Zimmerman said the deductions now being capped have been factored into real estate values, and taking some of them away will exert some downward pressure on prices.
When you start curtailing that and bringing that back, you will negatively affect house values, he said. How much? Who knows?
Another lingering question is whether the $20,000 cap is a harbinger of things to come in terms of government being less inclined to support policies designed to promote homeownership. The industry plans to continue to lobby legislators, particularly as more data become available on the number of homeowners being affected.
The longer the cap is a reliable revenue stream for the state, the harder it will be to raise or eliminate.
Zimmerman notes that in the United States, the mortgage interest deduction has been around for 100 years, adopted as part of the first federal tax code.
And its never been challenged like this, he said.