When Congress gets around to seriously discussing major federal tax reform — which may be more a question of “if” than “when” — the real estate industry will circle the wagons to protect the mortgage interest deduction (MID). After all, the MID has long been considered by the industry as the Holy Grail of tax reform. 

There’s no doubt the MID and the deduction for state and local taxes promote homeownership. But some argue the magnitude of resources that are allocated to these incentives don’t equal the benefit. They question whether the juice is worth the squeeze, so to speak. 

Opponents also maintain these provisions disproportionately benefit the wealthy. They claim very few people — only about one third — itemize their income taxes and thus substantial amounts of the foregone federal revenues are going to very few Americans, predominately the more moneyed. And besides, they opine, the MID is part of the problem with our overly complex income tax code that is chock-full of loopholes. 

Finally, opponents assert these deductions reward those who already have a home far more than the deductions increase homeownership rates. 

So, what’s our response? The National Association of REALTORS^®’ (NAR) position is that we acknowledge the federal tax code is overly complex and in need of reform. We’re agnostic on how that’s addressed, so long as those reforms support the goals of homeownership and the freedom to buy, maintain and sell real property. 

Now, some say this position makes us part of the problem and not the solution. We argue for reforms but resist any changes to the tax code that impact our industry. Guilty! And here’s why: Real estate generally, and housing specifically, drives a good chunk of the national and state economy, at 19 percent of the gross domestic product. Nationally, housing is a leading economic indicator because history shows that it leads the economy into and out of recessions. 

But there’s more. Unlike other commodities or other industries, housing creates social and community benefits beyond economics. A tax code that promotes homeownership is a tax code that strengthens families, neighborhoods and communities; lowers crime rates; and positively impacts kids, schools, civic involvement and family economic stability. In this ubiquitous impact, we stand alone.

This debate, however, is changing as we speak. Congressional Republican leaders, including House Speaker Paul Ryan of Wisconsin, as well as key members of the Trump Administration, including Department of Treasury Secretary Steven Mnuchin, are now pledging to leave the MID. However, current versions of the evolving Republican tax plans still pose a real threat to homeownership. The Republican “blueprint” for tax reform eliminates the deduction for state and local taxes and calls for nearly doubling the standard deduction. Either one of these changes would be a real blow to existing homeownership incentives, but combined, they could inflict some real damage. Here’s how.

First, the inability to deduct state and local taxes will hurt housing affordability, which will disproportionately hurt first-time buyers the most. This is especially true in high property tax states like Wisconsin. Remember, affordability is important not only for the initial purchase, but for the ongoing, annual costs of ownership. This deduction helps to offset ongoing ownership costs like escalating property taxes! 

Consider the fact that 92 percent of all Wisconsin tax filers who itemize their taxes claim the property tax as a deduction, with an average deduction of $4,635. Almost as many people, 81 percent of itemizers, claim the MID with an average deduction of $6,306.
Second, even if the MID is untouched, eliminating most deductions while simultaneously doubling the standard deduction would mean that only about 5 percent of taxpayers would claim itemized deductions, down from about a third of taxpayers under today’s law according to NAR.

NAR warns that the vast majority of Americans would no longer see a tax difference between owning a home and renting one.

Experts far smarter than me warn that these changes could cause a significant nosedive in the value of all homes across the nation. If that happens, NAR warns homeowners could once again see the value of their home drop below the amount of debt they owe on it. Deja vu all over again? Only this time, homeowners may put added pressure on local governments to cut property taxes and related services as well! That’s not a pretty picture.

As you can see, this tax debate is epic for our industry, and because it impacts every REALTOR^®, every REALTOR^® must engage in our lobbying efforts. How? Contact your member of Congress and let them know the true risks of tax reform done wrong. To effectively communicate this message, I encourage every REALTOR^® to gather real-life stories — from personal or family experiences, or from real examples of customers and clients who are homeowners today in part because of these tax incentives. If we can personalize this message by telling real stories about real people and real families, we will improve the chances that Congress will protect these important tax provisions.