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Trump To Ax Mortgage Interest Deduction

Dec 17 2016

For more than a century, homeownership has come with a small bonus: The mortgage interest deduction. It allows borrowers to deduct the interest paid on their home loans from their income taxes. Real estate agents, homebuilders and mortgage lenders have long used it as a selling point. Every so often it comes up in debate, but it is so popular that lawmakers are more than a little bit afraid to touch it. The future Trump administration apparently is not. 

“We’ll cap the mortgage interest, but we’ll allow some deductibility,” said Steve Mnuchin on CNBC Wednesday after confirming that has been asked by President-elect Donald Trump to head the Treasury Department.

The mortgage interest deduction is already capped at loans up to $1 million if you’re married and filing jointly, and at $500,000 if you file separately. That said, the median price of a home in the United States is just more than $200,000, so not a lot of people make it to that cap. The vast majority of those who do benefit earn more than $100,000 a year and are not the most cost-burdened homeowners.

The deduction is very popular, but it benefits far fewer taxpayers than one might think. The current home-ownership rate is around 62 percent, but of those homeowners, one-third do not have a mortgage. They own their homes outright, so the deduction would not apply to them.

Some homeowners, mainly middle- and lower-income families either don’t pay federal income taxes or don’t itemize, so the deduction wouldn’t apply to them either. Only about 40 million (or 22.5 percent) of the 173 million households in the U.S. benefit from the mortgage interest deduction, according to the Tax Policy Center.

For those who do itemize, here’s how the math works: Let’s say you have a $500,000 30-year-fixed mortgage at 4.5 percent, and you’re in the 33 percent tax bracket. In the first year of your loan, the deduction saves you just more than $10,000 in taxes.

If the Trump administration caps deductions at even $100,000, as Mnuchin suggested, that would not hit most borrowers because on that $500,000 (which is more than most loans in general) the total annual interest payment was about $23,000. Granted, homeowners may have other deductions, medical expenses, charitable, religious or otherwise, but most would not make it to $100,000 even with the mortgage.

Despite the small number of borrowers a cap would affect, real estate industry leaders oppose any changes, especially in an environment where they are trying to convince young millennials that a home is a good investment.

Millennials lived through the recession and the housing crash and saw what the crisis did to their parents’ savings. First-time buyers have been the missing link in the housing recovery, already cash strapped by low wages and high levels of student debt.

“We would strongly oppose any attempt to limit or eliminate the mortgage interest deduction. Realtors know that the MID is an important benefit not just for the millions of current homeowners who depend on it, but also for renters looking to make the transition into home-ownership,” said William E. Brown, president of the National Association of Realtors.

“We’re living in a time of tight credit and low inventory, with home-ownership rates hovering around a 50-year low. Doing anything that would make it harder for buyers to enter the market is a fundamental step in the wrong direction.”

Mortgage interest rates have been rising dramatically since the election in November, and that has already slowed demand among some homebuyers. Home prices also just crossed over to record highs in September, according to the S&P CoreLogic Case-Shiller Home Price Index.

Affordability is weakening, and while some claim that job and income growth will make up for it in 2017, the prospect of losing the deduction, meaningful or not, is another emotional barrier to entry for potential homebuyers on the edge of ownership.

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If you’ve ever considered investing in a few rental properties in Philadelphia or Bucks County, PA now might be a good time. Prices are still low in Philadelphia, but have been on the upswing. According to the National Association of Realtors, the median price of an existing home in a US metropolitan area grew 13.7% between July 2012 and July 2013, the latest in a 17-month streak of year-over-year price increases. 

New landlords can choose from properties that are likely to appreciate and a large pool of potential renters.Licensed realtor Pat Mueller cites a few reasons for this trend: “Many families have lost their homes to foreclosure and are entering the rentals market for the first time in years. Mortgages are also harder to get now, so fewer people are qualifying for a new one.”The more skills you bring to the table to get into Houses for Rent in Philadelphia Philadelphia or Bucks County, PA and the more time you have to devote to your properties, the faster you can make a return on your investment. 

But investing in rentals can also be disastrous (or too stressful to be worthwhile) without expertise. Here are three professionals you may consult about your new rental properties, and what you can do to mitigate how much they cost you:Handyman:  You may need to hire a specialist for some work on your rental. If you need new outlets or new pipes, for example, hire an electrician, plumber or licensed contractor. Handymen usually tackle smaller, more manageable tasks, like:

  • Painting and paint removal
  • Drywall repair
  • Minor appliance repairs (fixing a leaky toilet or faucet, among others)
  • Installing tiling or flooring, moldings, windows, doors
  • Refinishing decks, cabinets and other wood items

When You Could Skip It: You could do any (or all) of these projects yourself if you have the time and interest in learning. Of course, this only works if you live relatively close to your rentals and are flexible enough to service them on short notice. And if you’re willing to respond to the occasional 5 AM basement flooding.

Average Savings: Any base rates or costs-per-hour vary from location to location in Philadelphia or Bucks County, PA , but nationally, you can expect to spend an average of $60 to $85 per hour for repair costs. It general costs less to hire an individual handyman than a handyman employed by a company. Expect an additional charge if your job requires a trip to the store for materials.

Resident Property Manager As the owner of a handful of rental properties, you may be able to manage them yourself, but if you want help, a single resident manager would probably be more cost efficient than a property management company. Resident managers may:

  • Serve as a handyman
  • Advertise vacancies in your units
  • Show apartments to prospective tenants
  • Review rental applications
  • Collect rents

When You Could Skip It: Again, the closer you live to your properties and the more spare time you have, the less likely you are to need a manager. The obligations of being a boss will also cut into the time you save on maintenance.

Average Savings: The national median wage for residential managers is just over $25 per hour. Research the wages in your community and adjust according to how much responsibility your manager will take on. 

Real Estate Agent: Once you’ve gotten your financials in order and done your own research on the neighborhood(s) you’re considering, you might contact a realtor to show you potential properties. You can also arrange for a realtor in Philadelphia or Bucks County, PA to show rentals once they’re ready to rent.

When You Could Skip It: It depends. Even if you’re a local, or have thoroughly researched the neighborhood(s) you’re considering, a realtor is a great resource for a first-time rental buyer. Realtors have access to data and statistics not necessarily available to the general public and first-time buyers may not know all the right questions to ask. Using a realtor to fill your Houses for Rent vacancies is less of a no-brainer, depending on your other time commitments or whether you plan to hire a resident manager who could do the same thing.

Average Savings: As a buyer of rental properties, as when buying your own home, sellers typically pay most, if not all, of the buyer’s realtor fees. In this case, Mueller points out there’s little reason not to work with a realtor. For help in filling your units in Philadelphia or Bucks County, PA, the services of a realtor would set you back between 10-20% of the unit’s rent per month.  Mueller recommends interviewing with several brokers before making your final decision to invest into Houses for Rent .

The Bottom Line: As a new landlord, you can’t necessarily control the flexibility of your schedule or the amount (and cost) of unexpected repairs to your properties. Rentals are a long-term investment. However, to maximize profits from your Houses for Rent, new rentals, you can buy close to home and start small. It is best to begin with just one or two properties. This will allow you to maximize the time you spend on your properties’ needs, and minimize the amount you’ll have to pay anyone else.

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