As featured in The Wall Street Journal, Money Magazine, and more!
     

Home Mortgage Interest Deduction

This article was written by in Featured, Real Estate and Home, Taxes. 65 comments.


Although the home mortgage interest deduction is one of the most oft-cited benefits of owning a home, most taxpayers don’t take advantage of it because it requires itemizing taxes. If itemized deductions including mortgage interest paid throughout the year exceed the standard deduction, a taxpayer can take advantage of the benefit.

The benefit isn’t as great as it sounds. If you pay interest, it certainly does help to get a tax benefit, but it rarely tips the balance of the long-term financial effects of renting vs. buying a house. Don’t let the real estate industry sway your opinion about owning a house through this faulty rationale. And certainly don’t decide to take out a mortgage if you were intending to buy with cash. Since this is a deduction, your taxes are reduced by only a percentage of the interest you pay, related to your tax bracket.

The home mortgage interest deduction is currently endangered. The Obama administration and Congress are looking for ways to cut spending, and this tax deduction is on the table for consideration. Some estimated put the cost of this deduction at $100 billion each year.

Despite the cost and its overstated effects, the tax deduction has helped convince renters to become homeowners — at least among people I have spoken with. In other words, for the cost of $100 billion, the economy has seen the benefit of a growing real estate market for many years. This law has made the National Association of Realtors, a lobbying group for the real estate industry, very happy, and they are working hard to prevent the government from eliminating the tax deduction.

There are many rules that determine whether you can claim the interest you pay on your mortgage for a tax deduction. The rules help ensure that the benefit goes to home owners rather than “investors” who earn a living from flipping houses, though due to market conditions the past few years, that activity has been less of an issue.

The interest you pay for construction, purchasing or improving your primary or secondary home, whether through a mortgage, home equity loan, or home equity line of credit, qualifies. There are limitations, though. You can deduct interest paid on up to only $1,000,000 of home acquisition debt. For home equity debt, which is any loan that was taken not to construct, purchase, or improve a house, you can deduct interest paid on up to only $500,000 of this debt or the fair market value of the home, whichever is less. For taxpayers who are married, filing separately, each of these limits is reduced by half.

Normally, the total of all of your itemized deductions are limited by income, but that income limitation was lifted in 2010. It could be lifted again if the benefit is not eliminated.

Question for homeowners: Do you take the home mortgage interest deduction? Question for everyone: Should this deduction be eliminated for the sake of reducing the national budget deficit?

Photo: Wonderlane

Published or updated January 12, 2012. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

Email Email Print Print
avatar
Points: ♦127,465
Rank: Platinum
About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 65 comments… read them below or add one }

avatar Money Beagle

For most who use it (we do), this would mean you’d go and use the standard deduction instead of itemizing. This would impact us but not in an end-of-the-world way. Obviously I wouldn’t like it and I’m skeptical that the government wouldn’t just turn around and spend the ‘savings’ somewhere else, but if it truly were used to reduce the deficit, I could live with it.

One side consequence that I hope they address is that this could impact charitable donations. If you itemize, you get to write off your donations, where the standard deduction would not allow you to do that. My fear is that many would stop donating to worthy causes since they wouldn’t get the tax write-off any more. Maybe they could allow donations to be written off regardless of whether or not you itemize as a way to make sure that worthwhile causes don’t take an unintended hit.

Reply to this comment

avatar cubiclegeoff ♦896 (Dime)

This is not to say that you believe this, but I find it interesting that some people want less government intervention, and say that the services will be made up by non-profits. Yet there is always the cry that if we stop allowing charitable donations to be tax deductible, then charities will lose significant support and may end up shut down. So we need the government to continue to intervene and allow us to have our donations tax deductible.

Reply to this comment

avatar Dale

Cubiclegeoff,

I’ll take that bait. As someone who does believe Small Government is Beautiful, and voluntary support is much better than coerced support, I don’t think you have found a contradiction here.

The charitable tax deduction gives people a little more opportunity to choose which “good causes” their tax money supports. If a taxpayer is willing to contribute 3 or 4 times as much money as they would pay in taxes to a cause that the government concedes is beneficial enough to merit tax exempt status, then why not return a bit of spending decision power to the people?

I agree with you and most of this board on the home interest deduction: this government tax policy distorts the US economy by incentivizing people to overinvest in housing. Let’s phase it out and simplify our tax code. If we ever make it back to a Small Government that is just doing things we can mostly all agree it needs to do, then we could eliminate the charitable tax deduction as well. In the meantime, I’d say the charitable deduction is in the direction of a freer and better society much more than the home-owner deduction is.

Reply to this comment

avatar Greg

The mortgage deduction is not coercing people to buy homes. For over a century our country has agreed that home ownership is a good thing. Have you always been opposed to home ownership? If not, what changed? The answer is that lending institutions have caused the housing crisis, not the deduction.

Reply to this comment

avatar Underwhelmed

Cubiclegeoff and Dale,

You are assuming that the reduced services (quantity nd quality) would be missed. Time and time gain it has been proven that government overpays and under delivers. There are lots of disruptions in the economy caused by over spending on “social services”. In regards to the interest deduction, business gets the deduction, people should be on an equal footing and receive the deduction whether itemizing or not.

Underwhelmed

Reply to this comment

avatar Tom Dziubek

Yeah, but if you’re paying a mortgage you’re also more than likely paying property taxes. When you couple those two together, it becomes a big write off. Here in my area, I have many people paying ~9000 in property taxes and ~11000 in mortgage interest. That’s 20 grand that can be written off, which beats the 11,400 offered most married couples and, even better, 5700 if you’re single and own the home yourself.

Reply to this comment

avatar csdx

Not to mention if you live in a state with income tax, that too becomes something you can add to the writeoffs.

Reply to this comment

avatar rewards ♦31 (Newbie)

Eliminate this deduction. Either that or start allowing me to deduct my rent (which like interest does not go towards principle), interest payments on my car (which helps me keep my job), interest payments on my plasma TV (which helps me keep informed), interest payments on my credit card (which help me buoy the economy), ad absurdum

Reply to this comment

avatar skylog ♦368 (Nickel)

i agree, you clearly put it better than i would have.

Reply to this comment

avatar Tony

Or you could have not bought a TV and car that you couldn’t afford and kept your credit card payments in line.

Reply to this comment

avatar cubiclegeoff ♦896 (Dime)

I am happy to take the mortgage interest deduction and the property tax deduction. Having said that, it’s completely inequitable and I think it should be eliminated.

Reply to this comment

avatar Joel T

We were already taxed on this money once as income then we paid our mortgages with it. Is that asking to much to not have to pay taxes on the interest portion again.Im sure the banks can take care of this for us as this is income to them.

Reply to this comment

avatar Dr Dean

Mortgage interest deduction should be taken by all who qualify, why wouldn’t you?

As to whether it should remain deductible, other countries have managed to have a robust housing market without it.

As long as it is phased in over 10 years or so, it could be done without a huge disruption too. As to the governments proper use of the money, I remain skeptical…

Reply to this comment

avatar Greg

From a pure math perspective, the deduction will take at least $120K off the value of an existing $800K starter home in the Bay Area (I offer a personal example of this later in these comments to show I calculate this). I consider spreading out a $120K loss over 10 years (not to mention the extra $7200 in Federal taxes I’d have to pay each year) pretty friggin’ disruptive! Can you afford an extra $20K/year? Yes, this deduction favors people who own more expensive homes, but this does not mean they are rich and can afford them without the deduction. And before you go off into how they (we, as I am one) shouldn’t have bought a home we couldn’t afford, I will say I can afford the home I bought…if you include the deduction. And why wouldn’t I include a deduction that has been part of the Federal Tax Code since the Federal Tax Code was initiated in 1894? One can argue the merits of this deduction and whether it is fair (and should include discussion of why it’s only been thought of as “unfair” in the last 5 years of its 120-year history), but more importantly, it is egregiously UNFAIR to eliminate the deduction for people who have used it completely reasonably in evaluating their financial capabilities.

If you phased out the deduction over 60-100 years, maybe it could be done without a “huge” disruption. Consider that the average time a home is owned is about 7 years, but many buy them with the intention of living in them far longer (intention is important here, as it impacts the purchase decision). Why would I buy a house where I get 100% of the deduction now, but 0% of the deduction 10 years from now or 20 years from now or even 30 years from now? Even if I’m planning to sell the house in 5 years, I then have to sell it to someone who is going to lose another 50% of the deduction.

Basically, when everyone knows the deduction will go away, it will need to be phased in so slowly that it takes place over several generations of housing sales. If we say people buy homes with the intention of living in them for 20 years, that means we’d likely have to phase it in over 3-5 generations for it not to impact the price of the house without a “huge” disruption. We know that 3-5 20-year turnover periods (60-100 years) is more like 9-14 7-year turnover periods (the actual average turnover period). Thus, the 15% loss in the value of the house over 9-14 turnovers will be roughly a 1-1.5% loss, which I think is more in the neighborhood of something that is “not disruptive”. So, we can phase out the deduction over the next 100 years to make it not disruptive both to purchase intent (the 20-year cycle) as well as actual turnover (the 7-year cycle) – anyone have confidence that 1) Congress can agree on that and 2) they can stand by it? I don’t think so.

But just as importantly, I would question why something that has been part of America’s growth and the American Dream for so long is now all of the sudden such an issue. This deduction did not cause our debt and is not causing it now either – this is your classic red herring. The changes in lending behavior caused the housing crisis – the deduction is just an equation variable in the formula to determine housing affordability. Moreover, removing the deduction will have limited impact – yes, Federal Tax revenues will increase, but this will be offset by declining local property tax revenues and reduced revenues from capital gains earned from home sales when prices come down. Furthermore, it’s likely to force many people to leave their existing homes, causing a glut on the market that would drive prices down even further than the natural mathematical drop that would occur due to loss of the deduction. In many cases, particularly recently, this drop in home value would correspond with actual loss in money – down payments that are not recovered (not just previously unrealized home value).

Reply to this comment

avatar Ceecee ♦53 (Newbie)

I dunno, with the taxes around here renting is looking better every day.

Reply to this comment

avatar Kevin

I take the deduction, but because there is a lower cost of living in my area and I only took our a reasonable sized mortgage, I don’t see a huge benefit to this. I think this deduction should be eliminated because the benefit is skewed towards high income earners and high cost of living areas. Ideally, removing the deduction would be offset by a reduction in the overall tax rates that would benefit everyone.

Reply to this comment

avatar shellye ♦107 (Cent)

I itemize deductions on my tax return, and I pay on a mortgage. The mortgage interest deduction, along with my charitable contribution deductions and occasional medical expense deductions help reduce my tax burden greatly. However, if I could be assured that monies from the mortgage interest deduction would truly go to pay down the deficit, then I would give it up. But I am skeptical about our government’s ability to manage anything properly, especially money.

But removing the mortgage interest deduction might de-motivate some buyers. When that happens, the building industry goes into a slump, and would negatively affect our economy. So maybe keeping the deduction would be better off for the economy in the long run. I don’t know – I’m just speculating.

Reply to this comment

avatar cHERYL

No way in HELL would I give up one penny of my mortgage interest/prop tax deduction to pay down the debt!!! These idiots are all ready getting enough of the money that I work for..and because they have chosen to throw it away on trips, bonuses and every stupid thing known to man and then they want me to give them MORE??? That is like saying my family is hungry can you spare half of your paycheck to help me out and then I tell you after I get back from my two month vacation in Hawaii and pick up my Mecedes, I will be over to get the loan??

Reply to this comment

avatar Matt

As a homeowner I do benefit from the mortgage interest deduction. However, I also think that it should be eliminated. As you mentioned the effect of the deduction is that it pushes some people to buy homes who otherwise wouldn’t. This is something that we, as a society end up paying for in many ways.

By pushing people towards ownership, we almost always push them towards single family buildings. This increases suburban sprawl in our cities, and therefore increases things like time lost to commuting, pollution, and infrastructure costs.

Furthermore, home ownership decreases economic mobility, and therefore increases unemployment rates.

Reply to this comment

avatar Spokane Al

I believe the mortgage deduction should be eliminated. It allows people to purchase more expensive homes than they would have without the deduction, which, in the long term, causes home prices to rise. The whole system creates friction and artificiallity in the system.

If the mortgage deduction was eliminated I believe that, over time, home prices would drop and people would ultimately purchase the same homes for less money.

My reasoning is to move towards a simplier tax system. I am a tax preparer at the largest tax prep company in the country and would be happy to see us no longer needed by anyone other than those with the most complex tax issues.

Reply to this comment

avatar Greg

This is semantics, but important…the mortgage deduction does not cause home prices to rise, though I will admit it makes them more expensive than they’d be without the deduction. But the market has built in the deduction for already (it’s been in place since Federal Tax was initiated in 1894). What has made home prices rise is lower interest rates and more lenient lending standards. Lower interest rates allow someone to buy a more expensive home for the same monthly price – this increased buying power gets priced in by the market. More lenient lending standards creates a larger pool of home buyers, which drives up demand for housing and prices rise accordingly. The deduction is a component of the house price and allows someone to purchase a more expensive house, but in and of itself, it does not increase the price of the home – it’s already built in (and has been for over a century). I will agree it’s “artificial”, but it’s there and removing it would cause significant hardship for many and wreak havoc with home prices in areas with higher costs of living.

Reply to this comment

avatar Apex ♦478 (Nickel)

I benefit from this deduction.

It should be eliminated along with dozens of other carve out deductions, along with corporate welfare, and along with greatly reducing the entitlement obligations of social security and medicare/medicaid and reducing the military budget and eliminating a ton of federal agencies for which there is no purpose to their existence. You put all those together and you balance the budget immediately. Obviously that would be too drastic to happen in one year so it could be phased. It’s also worth noting that what I recommend above is very close to what Obama’s bipartisan debt commission recommended. Unfortunately those recommendations were summarily dismissed by all.

The Republicans are currently fighting to carve out an extra 60 billion dollars in cuts from a 1.6 trillion dollar deficit as if this small amount of peanuts is supposed to make any difference at all. The Democrats are strongly opposing the cutting of the peanuts.

Yes I have great optimism for any adults to do anything serious until the catastrophe stands directly in front of us with no means of escape. Then we shall all be punished severely. This is the path we will choose because our leaders are cowards and we continue to choose said cowards because courage is uncomfortable.

Reply to this comment

avatar jim

I agree with Apex pretty much.

Reply to this comment

avatar krantcents

I itemize and deduct mortgage interest as well as property taxes. This is suppose to encourage home ownership. I wonder what will replace this deduction if it goes away, because the banking lobby is too strong and housing is too important in this economy to lose it entirely.

Reply to this comment

avatar CB

It seems that without the mortgage- interest deduction, housing would become cheaper. The banks wouldn’t be making the money in interest, but homes would adjust in value to be affordable. Unaffordable housing is an oxymoron.

Reply to this comment

avatar Aryn

I definitely take the deduction. I think a lot of people who say it’s not worth much don’t live in high cost/high income states. I pay $22000 in interest right now, which is substantially more than the standard deduction. It also allows me to deduct property tax, state income tax (also very high in California), and a few other items. All told, my itemized deductions are well over $30,000, which saves me a bundle on taxes.

I don’t think they should take the deduction away because it really does make a huge difference for those of us in high cost states. Once deductions are factored in, owning costs the same, or less, then renting.

Reply to this comment

avatar skylog ♦368 (Nickel)

i agree with many here who agree that it should be eliminated, even though i admit i would take it if i were able. i find it disturbing that this seems to be a bigger reason than it should be for people to look into purchasing a house. i have read online, and heard it within my circle, how this helps many people move toward making the purchase. i can agree that if you have the home, and you are able, sure, take it, but it is still mind blowing to me how many people sign their name to such a huge commitment without taking true stock in their situation.

Reply to this comment

avatar wylerassociate ♦162 (Cent)

as a future homebuyer, I hope this deduction stays in place but I think it will be gone.

Reply to this comment

avatar Jonathan

I think this would actually have a much bigger effect on current homeowners than future homeowners. Once they remove the deduction, home prices will fall to compensate. They may not fall quite as much as you’d like, but think of it from the perspective of those who own homes already – the resale value will be much less than it otherwise would be.

I don’t own my residence, but I have two single family homes that I rent out. While I get a deduction for interest as an investment expense, the decline in property values would be a big issue when I go to sell (whereas any home I buy after the change would presumably already have that value reduction built into my purchase price).

Reply to this comment

avatar Dee

I agree with CB. I do take the deduction. However if it would make a more significant difference in balancing the budget and providing needed services, I would vote for getting rid of it. On the flip side, as you indicated, I feel that the deduction has played a big part in why housing cost so much (particularly in extreme areas of the country, CA, DC, NY, NJ…). If it does get phased out, current homeowners should be exempt since the deduction was already factored into to our home prices.

Reply to this comment

avatar Greg

Even exempting current homeowners would be problematic. When it came time to sell, they would lose significant value in their home, likely wiping out any benefit (and more) they’d accrue from keeping the deduction.

Reply to this comment

avatar Marie@familymoneyvalues

We used to take the deduction when we had a mortgage, but we paid off our house, which has been more beneficial to us in the long run than paying out thousands of dollars more for our house via interest payments to the mortgage company.

The US tax code is designed to let the government influence the lives of the citizens, by granting special discounts (like the mortgage deduction) for some expenditures and situations while punishing others with higher rates.

The income tax code should be abolished and a straight percent of income substituted in its place!

Reply to this comment

avatar Greg

The tax code allows government to influence desired behavior. For over a century, people have thought this deduction was a good idea and that home ownership was a desired behavior, allowing tighter-knit communities and the pride of home ownership – really part of the American Dream. Why is all of the sudden not a good idea? What’s wrong with making financially incenting home ownership over renting? In general (not always true,as I’m sure someone will feel obligated to point out), homeowners take better care of their property and are more involved in their community. This was a key reason this deduction was implemented 120 years ago when Federal Tax was first initiated.

Reply to this comment

avatar gotr31 ♦224 (Cent)

I take the deduction and will continue to do so until it is no longer an option. It will never be “fair” for everyone. There will always be someone who suffers and someone who benefits.

Reply to this comment

avatar Austerity Bill

Although I agree that it can’t be fair for everyone, I think that the deduction should be eliminated because it isn’t fair to anyone in today’s economic climate.

Reply to this comment

avatar Matt

@Gotr31

The reason the mortgage interest tax deduction is bad policy has nothing to do with fairness. It’s bad policy because we have to pay for it twice; first with the deduction itself, next with the ramifications of the deduction, which is mainly increased suburban sprawl.

Reply to this comment

avatar moneymatters ♦357 (Nickel)

We take advantage of the deduction because we can. Along with our property taxes and other charitable deductions it allows us to save a chunk of change on our taxes every year.

Do I think it would make much of a difference if we got rid of the deduction? The way things are currently going – probably not. Our government has become an endless sinkhole for wasteful spending. Duplicate agencies that do the same thing, wasteful entitlement programs, endless perks for those in the inner political circle and so on. I’m becoming more pessimistic every day that we’ll be able to do anything about this mounting debt because no one in Washington seems to care – they just keep adding to the spending, and refuse to cut anything! It just becomes an endless cycle of our politicians trying to retain their own power, no matter the consequences. (term limits anyone?)

I do think that the tax code in many respects has become more and more about social engineering, where the government tries to get people to do the things they want -by promoting it with tax credits or deductions. I don’t think that’s a good thing, and the tax code needs to be fully revised and simplified.

Reply to this comment

avatar John

I take the deduction, although it really doesn’t make that much of a difference. I live in one of those High cost areas D.C. and I only paid ~5500 in interest last year (I own a 11 year old 5 bedroom house, so no little shoebox).

I think the deduction should be eliminated. All I see it doing is getting people to buy houses that they have no business owning, all for a small tax break (although they end up spending way more per month than if they rented). The housing industry just wants to frighten people when they say it will hurt the market.

Reply to this comment

avatar Cejay ♦1,521 (Half-Dollar)

We take the deduction. When we were looking to save the money to pay off our mortgage some many people told us that we were being stupid since we would lose the deduction. I am so glad that we did not listen. But as to phasing it out if the government really used the money to but the deficit down then I would be agreeable. But we all know how the government is.

Reply to this comment

avatar 4hendricks ♦248 (Cent)

We take the deduction – if I had to choose between the deduction being eliminated, and other much needed social services (such as giving good health insurance to all Americans) I would say eliminate it. However, don’t punish me, because I don’t rent, I own – that is crazy. Owning your home means many more expenses – therefore homeowners deserve a tax break – if you choose to rent that is your choice.

Reply to this comment

avatar Reality Check

With all the moronic efforts congress has made to get people into houses they can’t afford, you want to take away the one program that encourages people to save up a downpayment and take on the responsiblity of homeownership? Homeowners have a greater (more permanent) stake in their community. Yes, it would be easier for me to rent and let my landlord take care of all repairs and updates but I would like to step up from lower middle class to middle class. What better way than to invest in a home that historically increases net worth? The $20,000 tax deduction (which probably puts around $6,000 back in my pocket each year) was a consideration in my decision to own vs rent.

Reply to this comment

avatar B Munster

How bout lower the rates and delete most, if not all deductions, including this one. Family related deductions only and possibly retirement related savings (to a limit).

Reply to this comment

avatar B Munster

Deductions like this, couple with other factors i.e. ridiculously low interest rates, caused overinflated housing prices. If housing prices stayed “normal” and there was never a deduction, trust me, you’d have more money in your pocket right now.

Reply to this comment

avatar Cheryl

I cannot imagine ANY homeowner with a mortgage NOT taking the deduction!!! This would RUIN homeowners to take that away! Most of us end up paying the dam outrageous property taxes with what you save on that deduction!!! This will do nothing more than TRIPLE the FORECLOSURE problem!! It is amazing that each year the bank can tell a homeowner that the value of their home has gone down by as much as 50K and then the property taxes go up by all most a THOUSAND dollars?? Which is BASED ON THE WORTH OF THE PROPERTY??? As always its LIES and more LIES so that everybody BUT the homeowner can benefit. It is no wonder that people are just throwing up their hands and saying here come and get it. This is NOT people who have bought a house they could not afford. These are homeowners who are getting SQUEEZED from every direction and the budge they orginally had when they BOUGHT the house they COULD AFFORD has now TRIPLED and the wages have NOT kept up!! The middle class SHOULD NOT be the ones that get hit with whatever the solution turns out to be! It should be those who have been handed everything for too many years and not worked a day for it AND those who make over 250k a year! The people that refuse to work and do nothing but stand there with their hand out need to be told GET A JOB! There ARE jobs out there and people just want to be paid what they think they are worth!

Reply to this comment

avatar jim

Cheryl,

There are actually LOTS of home owners with mortgages do not take the deduction. To take it you have to itemize. For itemization to be worth while you have to have more deductions than the standard deduction. There are many millions of mortgages out there that aren’t costing enough interest to equate to more than thee standard deductions. Consider someone who bought their home 20 years ago for $45k. That loan is paid down significantly by now. They are probably paying less than $2k in interest.

My cousin just bought a house for about $100k. At 4% interest he’s paying only $4k interest. His property taxes are around $2000. Thats $6000 combined. THe standard deduction for a married couple is now $11,900. HIs interest and property tax is only half way towards the standard deduction.

Reply to this comment

avatar cHERYL

That may work well for those who have low purchase prices, a high down payment and a low interest rate…all of that combined IS VERY RARE! So, it would KILL most homeowners NOT to take this deduction. Of course they need to itemize, however, if like myself they have deductions then it definitely helps them to get back some of this inflated tax that we pay.

Reply to this comment

avatar cHERYL

Just re-reading your comment…NOT too many houses 20 years ago for 45,000? Even 20 years ago a modest home was atleast 80+ Most people who are benefiting are the ones that bought in the 250K range and still owe close to that now after refinancing or consolidating any home equity loans they may have taken out. Still belief homeowners NEED that deduction to stay afloat.

Reply to this comment

avatar wylerassociate ♦162 (Cent)

If I was a homeowner I would gladly take the home mortgage interest deduction, this government spends too much money on programs that don’t bring value. I would want those programs to be eliminated first then I’d be ok with getting rid of the home mortgage interest deduction to reduce the budget deficit.

Reply to this comment

avatar Ginger @ Girls Just Wanna Have Funds

I think they should keep it and then allow renters to deduct their rent or a portion thereof. I would let my house go if they eliminated this deduction for sure. That’s part of the reason we bought in the first place.

Reply to this comment

avatar Jake

I believe the best course of action must be 2 fold.

Eliminate all deductions, local, state, sales, property taxes, and all permit and license fess.
Institute a flat tax across the board. No exceptions.

This would help everyone see how much the government truly costs and wastes. The government needs to cut the fat just like companies had to. Remember that Government employees do not add to the economy. Only the private sector does.

I could tell you what to cut and change but the press is so one sided and want to sell papers instead of information that there is no use.

Reply to this comment

avatar Ceecee ♦53 (Newbie)

I don’t tend to like any deduction that favors one lifestyle over another. It’s like the government telling us how to live, and rewarding us if we follow their suggestions. The whole mess is too complicated, we probably do need a flat tax.

Reply to this comment

avatar jim

I take the mortgage interest deduction.

Personally I think it should be limited rather than eliminated.

Reply to this comment

avatar Investor Junkie

It should be eliminated, but ideally should never have been in place to begin with. The issue is if they just cut it off (not say a 10 year phase out) it will kill property values. Especially in areas like where I live in NY. All of this change would give me more of a incentive to get out of tax glutinous state called NY. Real estate taxes are already outrageous and expected to go even higher.

Reply to this comment

avatar Marc S Kessler

Since interest rates are so low it probably won’t exceed the standard deduction in many cases any longer.

Reply to this comment

avatar Greg

The purpose of the mortgage interest deduction is to incent home purchases under the logic that this is part of the “American Dream” and helps build communities – in general, home owners are far more likely to stay longer and support their local community. In this aspect, it has been very successful for more than a century. To me, whether it’s “fair” or not is somewhat irrelevant – the question is do we still want to provide incentives for people to own their own homes? I can’t think of a good reason why the answer to this simple question would have changed in the last few years – this tax policy is not the reason for the housing bubble, the economic meltdown or the deficit. This tax policy has existed for more than a century without these issues – the change was in lending institution requirements. In recent times, as lenders relaxed requirements for down payments and credit worthiness, we also experienced the lowest borrowing rates in years. It’s really these lending policy changes that have inflated home values far more than the tax incentive.

So, getting rid of this deduction would seem to go against our seeming best interests in encouraging home ownership. One might argue that there is a short-term need (or even a long-term need) for increased taxes to pay off the deficit. While there might be a bump in federal tax revenues, depending on how it was implemented/phased in, we all know that housing prices would drop accordingly, and with them local property tax values. In addition, salaries are closely tied to local home values – while wages might not actually decrease if the deduction were eliminated, I believe they would grow more slowly or stagnate such that in a few years the effect was a loss of wages roughly equivalent to the fall in home prices.

While I said the “fairness” of this policy is largely irrelevant, the “fairness” of discontinuing this policy is very relevant. The mortgage insurance deduction is a huge benefit that affects a lot of people. I believe eliminating it would force many people out of their homes due to (effectively) larger payments, which I can’t imagine anyone would think is a good idea. It would also cause a significant drop in their home value, causing them a significant loss when they sold their home. Arguing that someone should not have bought something they cannot afford (as I’ve seen on this thread) is cold-hearted and/or ignorant – people went into the contract under the assumption that they would have an interest deduction. This is not an unreasonable assumption – mortgage interest has been deductible SINCE THE FEDERAL INCOME TAX WAS INITIATED IN 1894!

Here’s my personal example: I paid 20% down on my $800K starter home (1500 sq ft) in San Mateo, CA and have a 640K mortgage at 4.25%. My mortgage & escrow is ~$4100/month, of which ~$2300 is interest and $833 is property tax (1.25% tax rate). My effective tax rate is a little above 20% (would be higher I think without the mortgage deduction, but let’s take ~20%), giving me a savings of about $600/month. Thus, without the mortgage interest tax break, I’d be able to pay $3500/month. At my current interest rate, this would allow me to buy a house worth $680,000 (this factors in my lower property taxes). So, on a personal level, if the mortgage interest deduction were eliminated tomorrow, my house value would drop corresponding to the mortgage payment, and I would lose at least $120K when I sold my house. While our federal government would earn another $7200/year (my mortgage interest deduction), it would be offset by the ~$25K less in taxes they would earn on the sale of my house. Also, my local government would earn $1500 less/year in property taxes due to my lower home value. Realistically, housing prices would likely drop even further due to the glut of houses on the market from those who could no longer afford the payments.

Reply to this comment

avatar Brian

Something is only worth what someone will pay for it re: an 800k “starter home”. Why should those people in places with normal housing prices help pay for someone in San Francisco pay for their home? That’s what the rest of us are doing when we buy a house for $125,000 (or some other normal price), barely reap the deduction, compared to those buying 800k houses who get a huge deduction. Where I’m at, that 800k home is huge and therefore a rich man who can afford that (but then there’s the question of why someone with an 800k house would even have a mortgage….um the deduction?) would pay a lower percentage in taxes with the deduction. I’m helping him too because the tax rates could be lower if the deduction were eliminated. It’s not the only one I think should be eliminated. I believe the only deduction one should get is based on family size and even that should have limits. Then lower the rates for everyone. You choose to live in San Fran. Why should I pay for it? But then I have to ask, please don’t move to the midwest and overpay for houses, making the prices rise.

Someone above said mortgage rates affect the price of homes but taxes do not. I disagree with that. A guy above stated he could not afford his house with the deduction. Taht right there proves it.

Reply to this comment

avatar Greg

You said: “Something is only worth what someone will pay for it re: an 800k “starter home”.”
>>Not sure of your point – the starter home I purchased is worth $800K as that is what I paid for it (and others were bidding around the same amount and more).

You said: “Why should those people in places with normal housing prices help pay for someone in San Francisco pay for their home?”…”You choose to live in San Fran. Why should I pay for it?”
>>You are not helping me pay for my home. My salary is higher because I live in the San Francisco Bay area and it needs to be higher to support the higher home prices that allow me to live in the same place I live. My peers with the same exact job in my company who work in other areas of the country with lower costs of living earn $50K less simply because they don’t live in San Francisco. The Federal government earns $10K less in income tax from these people, but my mortgage deduction is about $3-4K more than theirs. Thus, I pay the government $6-$7K more than my equivalent based purely on salary and my mortgage deduction. The deduction is only one component and can’t be looked at in a vacuum.

You said: “Someone above said mortgage rates affect the price of homes but taxes do not. I disagree with that. A guy above stated he could not afford his house with the deduction. Taht (sic) right there proves it.”
>>I’m not sure if you were referring to me. I said that lower mortgage interest rates have caused home prices to RISE, but that the deduction has not. This is because the deduction has been built into prices for years (since 1894) – prices haven’t risen, they are just “artificially” higher because the deduction exists. If your mortgage payment went up by $600, would you be able to afford it? Why would someone stating he couldn’t afford his house without the deduction “prove” anything beyond the fact that the deduction is an important component of housing affordability? Please realize that this deduction has been part of the tax code for 120 years – why wouldn’t someone count on it? Do you blame retirees for counting on Social Security income?

Reply to this comment

avatar Dale

1894? That income tax system was declared unconstitutional by the Supreme Court, so our current system of Federal income taxes really began with the passage of the 16th Amendment in 1913. In 1913, the income tax impacted only the top 1% or so of incomes, starting with those who made over $220K (in current terms after inflation) having to pay 1% on the amount over. Are you really claiming Congress intended such a mortgage income tax deduction only available to those who made over 10 times the average per capita income back then would promote wider home ownership??

Reply to this comment

avatar Brian

The government should not be influencing who buys houses. That’s what’s caused this housing bubble to occur in the first place.

Reply to this comment

avatar Greg

The government has been influencing home purchasing for 120 years. This is not a recent occurrence. The mortgage deduction DID NOT cause the housing bubble.

Reply to this comment

avatar Dale

>> The Obama administration and Congress are looking for ways to cut spending, and this tax deduction is on the table for consideration.

Flexo,

Did you mean to write that our leading politicians are NOT looking for ways to cut spending, as eliminating this tax deduction would instead give them more revenue with which to work? Otherwise I fail to follow your logic. Or do you really believe that a tax deduction is spending?

Reply to this comment

avatar Dale

Greg,

Almost no one likes to see tax policy that works in their favor changed. And it’s difficult to change even a bad tax policy fairly.

You’ve just chronicled how the mortgage interest deduction tax policy has helped to make homes virtually unaffordable and prices more unstable around the Bay Area.

It’s hard to get economists to agree, but they are in widespread agreement that the mortgage interest deduction is bad tax policy. For instance, check out TaxFoundation.org Note that it’s account of original intent of those American, well, progressives who created a national income tax with its mortgage interest exemption is a bit different than your interpretation.

I lived in CA when the passage of Prop 13 to limit property tax increases was big news, but as usual no one followed through on the hard part of matching spending to revenues. More than in most states, those in CA face combined Federal, state, and local governments have made spending promises that they can’t afford to keep without huge tax increases. Including the ongoing IOUs to the trust funds, the Feds are spending 156% of revenues, while the state of CA is spending 117% of its revenue. Kicking the can down the road just doesn’t seem possible for too many more years. (Ask the Greeks.)

I don’t think we have 60-80 years to phase in corrective action. A whole lot of Americans are going to be pleading their cases that the changes aren’t fair. You make your case well, but some bets that you’d initiated during the real estate boom might play out even worse in the future. Good luck.

Reply to this comment

avatar brian

Just because you paid 800k for your house does not mean that’s what it’s worth NOW. I paid 145k for my house and I bet I couldn’t sell it for 135k now because of the bubble still bursting.

I never said the mortgage interest deduction CAUSED the bubble. I think a lot of things caused it and that might have played a small part but as you say, it’s always been there. All I’m saying is that when someone says they could not have afforded the house their in without the deduction, well that speaks for itself.

I should note too that I benfit from the deduction. And yes, I could afford a $600.00 increase in my mortgage because I live well below my means but I don’t think that was your point.

I believe that MOST if not ALL deductions should be eliminated, including the mortgage deduction.

Reply to this comment

avatar Greg

I will agree that this deduction has allowed some people to afford homes that they otherwise wouldn’t have been able to afford. In my particular example, it would effectively cost me another $600 a month – this I can afford, but it would certainly make it more difficult. Maybe for others this is the difference between buying the house and not buying the house.

I am a financially savvy person and my problem with this is not the interest deduction per se and whether my mortgage is affordable or not (though this is not inconsequential), but it’s the impact it would have on my home value and net worth. It would effectively wipe out my non-retirement savings (most of which is invested in my house via my down payment) decreasing the value of my house by $120K or more. While it would be cheaper to buy other houses in my area, I’d have to save another $80-100K just to buy my same house back (assuming banks would still want 20% down).

I just don’t think it’s fair to penalize families so significantly. I’m not wealthy and my home is $800K for 1500 square feet near a so-so public school. My kids share a room and we own 2 used cars – a 95 Civic and a 2007 minivan. We are not living large. The TV at the poor single-mom family we “adopted” last Christmas dwarfed the one we own. I wasn’t caught up in any housing bubble frenzy and didn’t think my house value would increase, or buy a house I couldn’t afford, or take out a mortgage with a teaser rate that would explode. I simply bought a house in the Bay Area.

Unfortunately, the deduction impacts not only the tax payment, but also the house value in areas where houses are expensive enough that it makes sense for owners to itemize. Imagine you had to take a $120K loss on your house because of a tax change. It’s just not fair. I think it would take several generations (60-80 years) to phase out the deduction at a rate that would make the hit on housing values tolerable to families that own today.

Reply to this comment

avatar krantcents

I thought I would never want to pay cash for home! I am always thinking about the taxes or this huge ($1M) asset just sitting there. I will have my current home paid off to coincide with retirement in less than4 years. I know I have one more move left to a single level home/cond. I gues I will make that decision when comes up in 5-10 years.

Reply to this comment

Leave a Comment

Connect with Facebook

Note: Use your name or a unique handle, not the name of a website or business. No deep links or business URLs are allowed. Spam, including promotional linking to a company website, will be deleted. By submitting your comment you are agreeing to these terms and conditions.

Notify me of followup comments via e-mail. You can also subscribe without commenting.

Previous post:

Next post: