The tax benefits of homeownership, which generations of U.S. residents have counted on, have been elusive for typical buyers since mortgage rates started tumbling in 2008, according to an analysis by John Burns Real Estate Consulting LLC.
For a married couple who put 20 percent down on a median-priced home and borrowed the rest, the standard deduction for 2015 is almost $2,500 more than what they’d get by itemizing their mortgage interest and property taxes, according to Burns. By comparison, those expenses easily exceeded the standard deduction in every year from 1972 to 2008, Burns said in a report released Thursday.
Borrowing costs close to record lows have reduced what homeowners are able to deduct when filing their income taxes. The standard deduction for married couples has risen to $12,600 today from $1,300 in 1971, meaning that the first $12,600 of itemized deductions has no benefit to taxpayers, according to Burns. That’s one reason why the share of first-time buyers in the U.S. remains depressed, he said.
“It’s a big reason why entry-level buyers aren’t coming back,” Burns said in a phone interview. “There used to be an urgency to buy a home for the tax benefits, but those benefits for many are gone.” A typical first-time buyer financing 95 percent or less of a median-priced U.S. home pays less than $12,000 in mortgage interest and property taxes, which isn’t enough to warrant itemizing, Burns said in the report.
The average rate for a 30-year fixed mortgage was 3.58 percent this week, the lowest in almost three years and down from 6.63 percent in July of 2008, according to data from Freddie Mac.
Of course, low mortgage rates are a boon for first-time buyers, making purchases more affordable. And while some homeowners aren’t getting the interest deduction now, that’s going to change as rates climb, said Robert Dietz, chief economist at the National Association of Home Builders. The deduction will then help offset the increase in borrowing costs, which are set to rise as the Federal Reserve increases its benchmark lending rate.
Seven of 10 homeowners with a mortgage take the deduction, based on an analysis by the homebuilders’ group of figures from the Joint Committee on Taxation, Dietz said. Some of those buyers probably made their purchases before the housing-market crash, when mortgage rates and home prices were higher, he said.