Bad news, homeowners: Tax bill would end deductions for interest on home equity loans
Millions of Americans who use their homes as a piggy bank may soon have fewer pennies to count on if they decide to borrow money to start a business, pay for college, or buy a new car.
Under the massive tax bill now poised to pass Congress — and be signed by President Trump before Christmas — homeowners no longer would be able to deduct the interest on home equity loans, a relatively cheap form of borrowing based on the equity in a property.
The provision eliminates the interest deduction on such loans, a move that could cost a borrower several hundred dollars a year, depending on the loan amount. Currently, borrowers can write off the interest on home equity loans of up to $100,000.
It’s one of several provisions in the bill that would reduce the financial perks homeowners have long enjoyed through their tax returns, a swing away from a policy that for decades has been aimed at encouraging homeownership. The moves are part of a strategy that Republican leaders say is designed to simplify the tax code and raise money to offset tax cuts in the bill.
The bill would also rein in write-downs for mortgage interest and property taxes. Such tax-reducing strategies have been popular in expensive housing markets, including suburban Boston.
While tax experts say that most people — especially renters and people with relatively small mortgages — would pay less in taxes under the bill, thanks to a near-doubling of the standard deduction to $24,000, those who itemize won’t be able to squeeze as many benefits out of their homes.
“That’s going to hurt some people,” said Jim Angelini, a tax professor at Suffolk University. “The government will be subsidizing homeownership less.”
Specifically, the plan would allow interest to be deducted only on the first $750,000 of a new mortgage, down from $1 million today. It would also cap at $10,000 the amount of state and local taxes that can be deducted on a federal return.
“In the broad context, these are all ways in which being a homeowner will no longer be treated as specially in the tax code,” said Alex Casey, a policy adviser at the real estate website Zillow.
It’s unclear what that will mean for home values, which have soared in recent years.
Groups such as the National Association of Realtors said they expect the lower mortgage interest deduction to cause home prices to fall, estimating a 10 percent drop under an earlier version of the overhaul that set the interest cap at $500,000.
Some housing economists counter that housing inventory could fall if would-be sellers stay on the sidelines and that potential buyers could have more cash in the bank, both of which could counteract the impact of the smaller deductions and drive prices up.
Either way, the tax bill is likely to do little to help people already struggling to buy a house in high-cost places such as Boston, said Nela Richardson, chief economist at the real estate website Redfin. She said getting a mortgage could become more difficult, inventory might be squeezed even tighter, and most of the gains from lower tax rates and other tweaks will accrue to the wealthy.
“This is a missed opportunity for housing,” Richardson said. “There was a way in this to start leveling the inequality we see in the housing market. This bill does nothing to change that, or to help people in need of help.”
Interest groups of all sorts are continuing to pore over the massive bill, even as lawmakers get ready to vote.
The move to lower the corporate tax rate from 35 percent to 21 percent will probably dampen investment in tax credits that often help fund affordable housing, said David Gasson, spokesman for Boston Capital Corp., which finances housing in Boston.
But advocates for affordable housing were relieved that the current version of the bill isn’t more harmful. Provisions that could have gutted financing used for about 3,000 low-cost apartments a year in Massachusetts were stripped out during negotiations last week.
“We broke even, which is better than getting whacked,” Gasson said. “Still, affordable housing development is going to suffer because of this.”
Likewise, hospital officials cited the “mixed results” of the final legislation. They’re glad that a deduction for medical expenses and a key tax-exempt bond program for hospital expansions survived but worry that repealing the individual mandate in the Affordable Care Act will lead to fewer people carrying health insurance.
That mandate required most Americans to buy insurance or pay a penalty.
Pharmaceutical companies welcomed parts of the bill, including the lowering of corporate taxes.
Some leaders in Massachusetts’ booming biotechnology cluster, however, are unhappy that it would cut in half a tax credit for developing medicines to treat rare diseases.
“It is disappointing to see any reduction in the orphan drug tax credit,” said Paula Soteropoulos, chief executive of Akcea Therapeutics, a Cambridge biotech.
“Meaningful incentives are crucial to reduce risk and foster relevant R&D and innovation.”