Who Owns a Half Million-Dollar Home?

After the release of the tax reform legislation from the House, last week’s question was “who will be affected by the new bill?”

One of the key elements of the tax reform is the proposed capping of the mortgage interest deduction at $500K. Under the current tax framework, taxpayers who own a home are able to reduce their taxable income by the amount of interest paid on the loan, which is secured by their principal residence. Interest is deductible on only the first $1 million of debt used for acquiring, constructing, or substantially improving the residence ($500,000 for single individuals if filing separately), or the first $100,000 of home equity debt regardless of the purpose or use of the loan.  The new tax reform legislation allows homeowners to take the deduction on their first $500,000 of mortgage debt, half of the current threshold. The new threshold will affect only mortgages on purchases made after the law is in force (but will not include refinancing). Thus, a new homebuyer will be able to deduct from his taxable income up to $15,475[1] under the new proposed tax framework, while he could deduct up to $30,950 under the current tax framework. Although $500K seems to be a decent amount of money, is it enough to buy a home in all areas in the United States?

Since all real estate is local, we calculated the share of homes[2] with a value higher than $500K by Congressional District. Based on the data, on average, 15% of homes with a first mortgage are worth over half a million dollars across the congressional districts. The share varies from 0.1% (13th District, Ohio) to 94% (14th District, California). Actually, one out of every two homes is worth over half a million in several districts in the following states: California, Connecticut, District of Columbia, Hawaii, Massachusetts, New York, Virginia and Washington.

Furthermore, we should bear in mind that the limit of $500K is not indexed to inflation, causing its value to diminish even further over time. Thus, we took our analysis one step further and calculated the share of homes with a value higher than $500K (subject to an inflation rate of 2%) in 2026 and 2036.

The map below allows you to see the share of homes with a first mortgage and value higher than $500K in 2016, 2026 and 2036.


It is true that the statistics above include people with a mortgage who already own a house. As we already mentioned, the MID cap will be applied to new mortgages only. Thus, someone would argue that these people will not be affected. It is true that there will not be a direct effect on these owners, but we expect that they will be less willing to sell their home. Consequently, homeowners are expected to be less mobile. Finally, the diminished role of mortgage interest deduction will impact home values negatively. By how much is debatable, but all homeowners can expect to lose some portion of their housing equity if the proposed tax bill become the law.


[1] In the first year of a 30-year mortgage (assuming a 20% down payment and 3.9% mortgage rate)

[2] Only homes with a first mortgage are included

Comments
  1. M. Spear

    I would expect that it is reasonable for anyone able to qualify for a $500K mortgage (remember it’s not a $500K home) to shoulder a larger share of the tax burden.

    Not exactly fair but certainly reasonable!

  2. Kurt Struss

    Your information is very misleading!!!!!!!!!!!!!! you talk about the $500,000 cap limit on the interest deduction and then talk about a $500,000 house? How are they related? Nobody has a $500,000 house with a $500,000 mortgage (I hope). If they do have a $500,000 mortgage they can deduct the whole amount on the new plan!!!!!! You should be talking about $700,000 homes plus in value. If someone buys a $1,000,000 dollar house and puts 20% down and has an $800,000 mortgage the only portion of the Interest not able to be deducted from the taxable income is the $300,000 in interest paid. If you think this is going to impact the housing market you are crazy. With your scenario this equates to about $3,000 a year for someone that can afford a Million Dollar home. It will be more than offset by the middle class number of people able to afford a house because of a better economy and more money in their pockets.

  3. Dear #NAR: PLEASE… PLEASE pay attention when you write something like this! “Who Owns a Half a Million Dollar Home?” is not the relevant question. Throughout the blog post you use the ‘value of a home’ interchangeably with ‘the balance of a mortgage’ as if it means the same thing and they simply don’t. It calls the ENTIRE POINT of the article into question. Further, you give no references so I can’t check your data to see if you know the difference.
    Please educate if you’re going to educate… or just keep quiet.

  4. Brad Welborn

    Your used $500K as the home value, but indicated a mortgage at 80% of value, so the “home value should have been $625K or 100% of value.

    Based on your map, it appears this mainly effects homes in high tax areas such as Washington, DC, New York and California. While those wishing to sell and get out of those high tax states will probably look at the low tax states like Florida as a better environment to live in.

  5. Anyone have a $500,000 mortgage is NOT MIDDLECLASS. Inmy 45 years of selling real estate, I have never had a purchaser make a decision to purchase or not purchase based on the amount of mortgage interest they could itemize on their tax return.

    If you have to be concerned about a tax deductin for mortgage interest, you are over your head in debt and perhaps should rething hyour plurchase. This counry has to learn the difference between needs and wants.

  6. Joseph Galster

    You’re throwing the baby out with the bath water.
    Your opposition to the senate tax reform bill is based on one small component. When taken as a whole this legislation will benefit all American Taxpayers.

  7. David Erickson

    I find this information somewhat erroneous. Unless I am mistaken, the tax bill relates to the amount of the mortgage ($500,000 versus the current $1,000,000), not the value of the home. Most people buying a $500k + home are buying with a substantial down payment. Therefore, the purchase price (value) would be significantly higher than these mortgage interest caps. Using data with the percentage of people owning homes at $500K+ value will include many homeowners that will not be affected by the $500k maximum mortgage amount for MID.

  8. Chris Carter

    Home values are NOT the issue. The amount of mortgage debt IS the issue. At 80% initial LTV, the value can be $625,000 in order to max out the $500K limit. Financing at those levels usually requires 20% down. And if the standard deduction doubles, less people will be itemizing. Note that the mortgage interest deduction only applies when itemizing deductions.

  9. Emily

    Sad that NAR will only look at the mortgage deduction, not the overall benefit of tax reform to the American families. The reform will ultimately save overall, and encourage responsible homeOWNERSHIP. Isn’t the goal owning a home, not being indentured to a lender? Less tax benefits, encourage borrower to pay off their home

  10. Ned Madonia, MBA, CCIM, CDPE

    At times one must put what is good for the Nation ahead of self interest. While this new law will affect a few, by in large it will help millions. For those who are living in states with high state and local taxes this should be looked at as an opportunity to begin to look at those policies that they can most effectively address as they are closer to home e.g. Local and State Tax and what they are being used for.
    The new proposed law will affect housing prices with the top end of homes perhaps loosing some value, homes below 500K will likely increase in price and I believe that over all the effect will be positive in that new construction techniques will be developed to lower the construction cost .
    The doom and glimmers need to put this proposed new law into perspective and start looking at the role the high tax states play in laying off their federal tax responsibilities on other states because of their state and local fiscal policies.

  11. Harry

    I’m for doing away with all tax deductions except for schooling, individual, and dependant family members. It was said people would quit buying cars when that deduction was eliminated . It didn’t happen.

  12. Ted Holsten

    I believe this article is very misleading the way it is written. The author does acknowledge that the tax deduction is for interest on mortgage debt up to $500,000.00. However, the $500,000.00 is repeatedly referred to as home value. It appears that the statistics cited are for home values of $500,000.00 rather than homes with $500,000.00 mortgages. Unless I am badly mistaken, the example calculation should have used a home value of $625,000.00 with a $500,000.00 mortgage (80% loan-to-value @ 3.9%) which would calculate to an allowable income tax deduction of something over $19,000.00. I also believe the discussion on home value inflation tends to muddy the water. The increase of home value has no impact on the mortgage interest deduction. Inflation merely increases the owner’s equity on the homes as mortgaged (which is a good thing). It only affects any refinancing in the amount in excess of $500,000.00. I realize, it also reduces the % of value that the $500,000.00 will represent on the home value of homes purchased in the future reflecting inflated values.

  13. Great post! All good info for educating my clients with. Still not sure when this law will go into effect.

  14. This sounds like a slippery slope to me! Once you start no one is safe for the future. Now they propose houses over $500,000 then what happens in a few more years? I do not nor will I ever own a home with a value of over $500K but do not feel it is justified to increase tax paid by someone else in this way.

    I advocate reduced spending over tax increases.
    Sharon Weber

  15. Mark Hanna

    I’ll a Realtor an have been for the last 26 years!
    I do realize there are a small % of people that own a $500k home or greater! Still I do not like the bill for the fact of reducing the Mortgage
    Interest cap from $30k to half of that! Also the itemized deductions are cut down!