This morning, Redfin CEO Glenn Kelman sent the below email to Redfin real estate agents to help them address customer questions about the tax-reform plan Congress unveiled today, which would lower the mortgage-interest deduction cap from $1 million to $500,000. The proposed change won’t affect any customers borrowing less than $500,000.
It’s Just a Plan. Plans Change.
Anyone borrowing more than that should first understand that the plan released today may not become law, or the plan may change to keep the current mortgage-interest deduction, which is popular.
But If Passed Later in the Year, the Plan Would Take Effect Tonight
But in its current form, the new proposed cap would apply to a customer who has not entered into “a binding contract” to buy a home by today, November 2. A purchase agreement with inspection and appraisal contingencies is still likely to be considered binding.
Eliminating the Tax Break Could Cost Affected Customers a Few Thousand Dollars a Year
Under the proposed change, if a customer enters into a contract to buy a home after November 2, and borrows $750,000 to buy that home, for tax purposes she will only be able to deduct from her taxable income interest on the first $500,000 of that loan.
If a customer is in a binding contract by the end of today, she will be able to deduct from her taxable income all $750,000; even if the plan passes as-is, the current law’s $1-million cap would remain in effect for sales under contract by today. Depending on the interest rate of the loan and other factors, this difference could amount to a few thousand dollars in higher taxes per year for the customer in contract after November 2.
The Plan May Lower Other Taxes
Of course other parts of the plan, if passed, could lower a customer’s taxes in other ways, unrelated to the timing of her home purchase. This note isn’t to agree or disagree with the proposed plan, but only to explain its potential impact on our customers.