Over the years, politicians and housing activists have debated the merits of the mortgage interest deduction (MID), in terms of how it affects homeowners and the real estate market. As we approach tax day, now is a great time to review just what the MID is and how it impacts current and future Atlanta real estate residents.
The MID provides for the reduction of homeowners’ taxable income by the amount of interest they have paid on their home loan during that year. The tax advantage was originally instituted to encourage homeownership and help families achieve the American dream of owning their own home.
The MID was most recently modified with the Tax Cuts and Jobs Act of 2017. The law lowered the level of mortgage debt for which mortgage interest can be deducted from $1 million to $750,000. Loans against home equity (home equity lines of credit, home equity loans or cash-out refis for an amount above the original loan amount) are eligible for the MID only if the funds are used for certain types of improvements to the mortgaged property.
Mortgage debt acquired on or before December 15, 2017, is grandfathered in and is still eligible up to the $1 million threshold. This includes refinances of the original mortgage debt.
Perhaps even more significantly for the MID’s usefulness, the 2017 law raised the standard deductions for taxpayers. The result was that many homeowners who were eligible for the MID no longer benefitted from it. At the time of passage, the National Association of Realtors reported that only 12-13% of filers would be eligible to claim the deductions by itemizing, removing the tax advantage of owning for those taxpayers.
That prediction turned out to be true for millions of homeowners – taking the standard deduction resulted in more tax savings than itemizing their mortgage interest. The Wall Street Journal reports that only about 13 million filers claimed the MID in 2019, compared with about 33 million in 2017.
Back in 2013, proposed legislation would have repealed the MID completely. At the time, organizations lobbying against the change said that removing the MID would reduce the demand for housing. The drop in demand, they argued, would lead to lower house prices and home values, resulting in significant loss of wealth for current homeowners.
As an example, just a 1 percent decline in home prices would result in a loss of $185 billion for American households. A 6 percent decline would decrease household net worth by $1 trillion.
This is a prediction that, fortunately, did not come true with the more limited application of the MID. Due to factors unforeseen in 2013 (including, but not limited to, a worldwide pandemic!), changes in the MID’s application have not resulted in lower home prices.
Due to high demand, shortage of inventory, supply chain disruptions, historically low interest rates and other factors, house prices have grown at historically high levels instead. For example, in the Atlanta-Sandy Springs-Alpharetta MSA, home prices grew 20.8% year over year in the fourth quarter of 2021, according to the FHFA Home Price Index. It ranked 25th nationally among MSAs in the most recent quarterly report.
Unprecedented demand and house price growth shows that, in the current environment, the presence or absence of the MID does not drive the housing market. Still, while the it is not as widely used as it was before 2017, the MID continues to provide benefits for millions of homeowners, including owners of Atlanta real estate.