Black Knight: Tax Reform Could Constrain Housing
December 4, 2017
While the House of Representatives and the Senate seek to combine their respective tax reform bills into a single piece of legislation, the Data and Analytics Division of Black Knight Inc. has voiced concern that the standard deduction, mortgage interest deduction (MID) and capital gains exemptions featured in this legislative endeavor could create new problems for current and prospective homeowners.
“Both tax reform proposals double the standard tax deduction, which may, in many cases, provide a greater benefit to renters than to homeowners,” said Executive Vice President Ben Graboske. “It may also reduce the tax incentive to purchase a home and generally make the MID less valuable to borrowers.”
Graboske added that a reduction of the MID would create difficulties on an already constrained available housing inventory. “Almost three million active first-lien mortgages have original balances exceeding $500,000, the cap proposed in the House version of the tax bill,” he continued. “These borrowers would be exempt from the limit. We’ve already seen signs of ‘interest rate lock’ on the market, as homeowners with low interest rate mortgages have a disincentive to sell in a rising rate environment. The question now becomes whether the proposed tax reform adds another layer of ‘tax deduction lock’ on the market. Do these homeowners now also have a disincentive to sell their home in order to keep their current interest rate deduction of up to $1 million? If so, this would potentially add new supply constraints.”
Graboske added that that proposed changes to the capital gains exemption on profits from the sale of a home could impact approximately 750,000 home sellers per year, with more than 14 percent of property sales were by homeowners falling into that two-to-five-year window proposed in the tax reform legislation and who would no longer be exempt from capital gains taxation.
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