As the House and Senate search for common ground between their respective tax overhaul plans, reports indicate at least one discrepancy – the cap on the Mortgage Interest Deduction (MID) – might already be resolved.
Editor’s Note: Certain numbers in this brief have been updated since initial publication. We will continue to update as appropriate to reflect newly reported elements of the reconciled tax reform legislation.
Under recently proposed tax reform legislation agreed upon by the House and Senate, the chambers agreed to split their differences and cap the Mortgage Interest Deduction at $750,000 — up from a $500,000 cap in the original House bill, but down from the $1 million cap in current law (which was maintained in the initial Senate version of the bill). A vote is expected as soon as early next week (week of Monday, Dec. 18).
Under the current setup, roughly 44 percent of U.S. homes are worth enough for it to make sense for a homeowner to itemize their deductions and take advantage of the mortgage interest deduction.[1] Under the new bill (as reported), that proportion of homes drops to 14.4 percent. Interest on second/vacation homes will remain deductible, but will also be capped at $750,000.
This analysis assumes:
The new bill under discussion – with an MID cap and limitations on individual deductions – makes it very likely many individual filers may no longer find it financially advantageous to itemize deductions, getting rid of the need to claim MID in the first place. Instead, more homeowners are likely to choose to take the larger standard deduction, as the pool of homes worth enough to make maximum financial use of these deductions shrinks. Given the size of the increase to the standard deduction, a shift away from itemizing would likely occur regardless of any change to the maximum MID cap.
The share of homes impacted under the proposal will vary greatly from county-to-county based on local home values and tax rates. For example, Zillow’s analysis shows that about 98 percent of homes in Washington, D.C. are worth enough under current law for the mortgage interest paid in the first year of the loan to be sufficiently higher than the standard deduction. As it stands, it may make sense for those homeowners to take the MID instead of the standard deduction.
Under the reported compromise bill, 64 percent of D.C. homes are valued high enough for an owner to get a better deal by taking MID (and deducting a capped amount of property taxes) than they would by taking the standard deduction. Homeowners in Los Angeles County would see a similar reduction, from 94 percent of homes meeting that threshold under current law to 48 percent of homes if these changes take effect.
It isn’t just the faster-moving, pricier coastal housing markets impacted by the tax overhaul. With the proposed changes, the fraction of homes in Cuyahoga County, Ohio (essentially the city of Cleveland and immediate suburbs), worth enough for taking MID to feasibly be a better deal drops from 21 percent to 3 percent.
Full county-by-county changes in the share of homes valuable enough to take MID under current and most recently reported changes to the law are available here, or by contacting press@zillow.com
Home value assumptions were based on property-level Zestimates as of November. Other data sources and assumptions made for purposes of this analysis include:
[1] Assuming they are in the first year of paying back their loan – when interest payments are largest – and they have a 30-year, fixed-rate mortgage at a 4 percent interest rate.
