Nerfed Tax Deduction Sidestepped By Savvy Prospective Homebuyers

THE HOME ON THE RIGHT is more likely to fall under the Mortgage Interest Deduction’s lowered cap of $750,000, but wise buyers for the home on the left could feasibly qualify for the deduction if they’re able to re-work their mortgage. (Photo: News-Press)

The “cooling effect” speculated to hit housing markets due to the lowered Mortgage Interest Deduction cap has been avoided by the kind of upper-tier market most prone to experience it, such as the City of Falls Church. Prospective buyers have instead worked around the new law, either by getting creative with finances or making tradeoffs with home buying decisions.

When the Tax Cuts and Jobs Act was passed in 2017, one of the key changes it made was lowering the Mortgage Interest Deduction from $1 million to $750,000. The deduction offered anyone who purchased a home below the cap the option to write off the interest on their mortgage, allowing them to get more home for a more reasonable price.

The tax law’s overhaul two years ago had some market observers believing it would splash cold water on the hot housing market by negating a unique perk of homeownership found in the Mortgage Interest Deduction. A New York Times story from August showed that wasn’t the case, with most markets nationwide continuing their steady growth in activity thanks to the increased standard deduction.

Virginia’s abundance of high-priced homes, especially in Northern Virginia, is why it is one of two states that used the deduction the most (New Jersey was the other), according to Northern Virginia Association of Realtors president Christine Richardson. In 2016, per Richardson, 29 percent of state taxes filed took the Mortgage Interest Deduction. State numbers weren’t available for any years after that, but nationally, the deduction’s usage dropped from 21 percent in 2017 to nine percent in 2018.

Richardson believes that Virginia would follow suit with the national trend, and notes some of her clients have even mentioned restructuring their mortgages to accommodate it during the homebuying process.

“I’ll occasionally hear from high-end buyers that ‘Well, I was thinking about putting less down, but what difference does it make if I can’t write off the interest anyway? I might as well put more down and keep my mortgage below $750,000 so it’s all tax deductible,’” Richardson said, who added that the reduced cap hasn’t been any kind of deterrent on a decision to buy or not.

Elliott Oliva, a realtor at Keller Williams in McLean, echoed Richardson’s point about buyers’ strong interest in local homes. At team meetings with other Keller-Williams employees, Oliva mentioned that he and other agents haven’t identified that the Mortgage Interest Deduction’s lowered cap as having prevented any sales from closing. Average prices for single-family homes in City have gone up at least 12-14 percent since the new tax law passed.

What it has affected, however, is how much home people are willing to buy. For instance, some must-haves that Oliva cited were three-level houses and the right location. If those boxes are checked, Oliva’s seen buyers skip out on nice-to-haves, such as an updated, open concept-type of kitchen. It’s all about personal circumstances in Oliva’s eyes, and those are subject to each buyer’s situation.

“People will make adjustments to their price-point if need be. Sometimes they might take money out of their retirement if they really want the house, but not everyone has that kind of leverage,” Oliva said.

The housing market has been in a gradual upswing since 2008, per Oliva, and the change in the Mortgage Interest Deduction isn’t strong enough to sway that.