The GOP is set to eliminate one of the biggest benefits of owning a home

Thomson Reuters

• Housing industry trade organizations immediately condemned the House's tax bill when it passed mid-November.
• The Senate's version passed over the weekend. It won't halve the mortgage interest deduction like the House bill, but could still remove tax benefits for homeowners.
• The Senate's bill raises the standard deduction, meaning it's less likely that households will exceed that threshold and choose to itemize their mortgage interest.
• Both versions could end up weakening home prices.

The tax reform bill should keep homeowners on alert.

Early on Saturday, the Senate passed its version of the Tax Cuts and Jobs Act (TCJA), pushing the law closer to President Donald Trump's desk for signing. The bill's differences with the House version, passed mid-November, now need to be negotiated in a conference committee.

The key difference between the two bills for homeowners is in the amount of mortgage interest that can be deducted from taxes.

The House version, which housing industry trade organizations swiftly condemned, halves the mortgage interest deduction to the first $500,000 of a loan.

The Senate version maintains the status quo at $1 million. But it removes the deduction that can be taken out under current law for interest paid on home equity debt. It also increases the standard deduction for all income subject to taxation to $12,000 for individuals (from $6,350) and $24,000 for married couples (from $12,700).

This means, like the House's bill, the Senate version removes some incentives for homeownership, according to Danielle Hale, the chief economist at Realtor.com.

"Even though the mortgage interest deduction is being kept for mortgages up to $1 million [under the Senate plan], the higher standard deduction still makes it less likely that households will exceed that standard deduction threshold and choose to itemize," Hale said.

In other words, the higher standard deduction may eliminate a key tax benefit of homeownership. Taxpayers can generally save money if their itemized deductions exceed the standard deduction.

The standard deduction is indexed to inflation, while the housing provisions are not designed to be adjusted for overall price increases. And so if inflation picks up, the standard deduction could exceed the point where it makes sense for taxpayers to take advantage of mortgage-related deductions, she said.

Home prices could fall

If the House's plan to cut the mortgage interest deduction to the first $500,000 of a loan becomes law, it would remove the benefit for new homeowners in many high-cost markets. The share of recent purchase loans between $500,000 and $1 million, which would benefit from deductions under current law, is as high as 48% in San Francisco, 38% in Los Angeles, and 22% in the Washington DC area, Hale said.

"For some of those homebuyers, the lack of those deductions might mean it makes sense to buy a home, or it doesn't make sense to buy a home," Hale said.

Home prices would fall because of lower demand. But the impact would vary by region, with a worse effect on more expensive markets. The District of Columbia, Hawaii, California, New York, and Connecticut have the greatest share of people with mortgages over $500,000, according to The Washington Post.

The impact of changing the mortgage interest deduction threshold would also depend on the share of homeowners in each area already itemizing the deduction.

The House's proposal would affect trade-up buyers more than first-time buyers except in some more expensive markets where even entry-level homes cost more than $500,000.

The lower deduction would apply to only new mortgages. Still, homeowners whose properties are worth more than $500,000 may be discouraged from moving, since they could face a new tax bill. That could worsen the inventory shortage in some of the pricier markets, Hale said, since supply is already weak at the lowest price points.