The Impact of Federal Tax Reform on Massachusetts Homeowners
As Congress starts the debate on tax reform, it is important they not make changes to the mortgage interest deduction or the real estate property tax deduction as this will affect nearly every homeowner and, ultimately, raise taxes on many homeowners throughout Massachusetts. Of the approximately 1,570,000 owner-occupied houses in Massachusetts in 2014, 1,092,000 -70% – had a mortgage. A change affecting this many homeowners would have widespread impacts.
Of the 1,000,000 + homeowners in the state with a mortgage, 85.6% of them claimed a deduction for mortgage interest (MID). The total amount deducted was $8,612,682,000. This means that the average taxpayer claiming the MID subtracted $9,200 from taxable income in 2014 as a result of the MID. At a marginal rate of 25 percent, this means that the average taxpayer saved $2,300 in taxes as a result of the MID. The total tax savings from the MID in Massachusetts in 2014 was $2,153,170,500.
Additionally, in 2014, 1,102,600 taxpayers in Massachusetts claimed a deduction for real estate taxes. The total amount deducted was $6,583,858,000. This means that the average taxpayer claiming the real estate tax deduction subtracted $5,950 from taxable income in 2014.
At a marginal rate of 25 percent, this means that the average taxpayer saved $1,490 in taxes as a result of the real estate tax deduction. The total savings from the real estate tax deduction in Massachusetts in 2014 was $1,645,964,500. If a taxpayer claimed both the mortgage interest deduction and the real estate tax deduction, the average taxpayer saved $3,790 in tax payments in 2014.
If the MID and real estate tax deductions were eliminated, the loss would not be a one-year event; homeowners lose out on these potential savings each and every year. The present value of these lost savings could total $97,413,717,900. The value of all owner-occupied real estate in Massachusetts in 2014 was $641,494,529,600. If the lost tax savings are fully capitalized into the price of houses, the average decline in value in Massachusetts could be 15%. From the individual perspective, the median priced home in Massachusetts in 2014 was $376,300. A decline in value as projected could mean a loss in home value of $57,150 for the typical home owner. The impact of losing the mortgage interest and/or the real estate tax deduction goes beyond the individual taxpayer. If homes decline in value by anything close to the predicted amounts, it could have major implications for state and local budgets, affecting everything from schools to police departments and beyond.
We will be keeping an eye on the real estate tax proceedings on the federal level, and will continue to provide updates on the progress of the tax reform debate.
Go HERE for more information about federal real estate tax provisions.
 Marginal rates range from 10 to 35 percent.
 Present value calculation assumes 3.9 percent discount rate and 1000 year time horizon.
Sources for the data above include: Internal Revenue Service 2014, American Community Survey 2014, National Association of Realtors® 2014; All calculations are by the National Association of Realtors® Research Division, July 2017.