Mortgage deduction: Should this sacred cow be slain?

There’s been a fair amount of coverage recently regarding the proposal to abolish the mortgage interest deduction (MID) currently offered to homeowners on principal residences, investment properties, and equity lines. And with the 2012 elections approaching, politicians are curious to know where voters stand on the issue.


According to a poll conducted on behalf of the National Association of Home Builders, 71 percent of the respondents opposed the elimination of the MID, and the majority of voters from both major parties indicated that they’d be unlikely to back a candidate who supports eliminating the deduction.  


At first glance, it’s hard to argue with this line of thinking: Doesn’t it seem counterintuitive to take away an incentive to homeownership when the state of the housing market is more uncertain than ever? Two other groups with significant lobbying power– the Mortgage Bankers Association and the National Association of Realtors– note that eliminating the deduction would lower housing prices and hurt homeowners during a time when many of them are already struggling.  These two groups, along with other supporters, believe the deduction has a positive effect on the economy by encouraging homeownership.


But just how helpful is that deduction?


Presently, only the 35 million tax-paying homeowners who itemize deductions (roughly 40 percent of all those eligible) can claim the MID, which allows homeowners to deduct the interest on loans up to $1,000,000 and home equity lines up to $100,000. According to the Joint Committee on Taxation, the average benefit to a taxpayer making $50,000 to $75,000 a year is approximately $1,227 while those earning more than $200,000 annually see a benefit of around $6,600. Given these figures, it’s easy to see why critics view this as a tax break that favors the wealthy and provides an incentive to borrow more money, a factor some economists believe played a significant role in creating the housing bubble.


Proponents of eliminating the deduction also point out that since the 1986 tax reform, which eliminated credit-card interest as an allowable deduction, homeowers have relied on their equity lines to fund their consumerism. Consequently, households have become increasingly leveraged and the debt-to-income ratio has risen. Couple this with eroding equity, which is a primary factor in many foreclosures, and it’s easy to see why there’s cause for concern.


So what does all this mean for the Charlottesville area? Realtor Jim Duncan, who blogs about the local housing market at realcentralva.com, believes the elimination of the mortgage interest deduction is not a bad idea overall, as long as it’s done in conjunction with comprehensive tax reform. Whilte such thinking places him at odds with many of his desperate colleagues, Duncan points out that the deduction rarely plays a decisive part in the homebuying process.


“It’s never been one of the top five reasons my clients buy,” says Duncan, who agrees that the timing for proposing the elimination is less than ideal– far less than ideal.


“Charlottesville buyers and sellers are looking for stability," he says, "and even having the discussion about the MID is enough to inject fear into an already uncertain situation."


But maybe the biggest issue, locally and nationally, is the $100 billion at stake.  


That’s the estimated amount the deduction will cost the government in 2012. Theoretically, if the MID were eliminated, those dollars would flow to Uncle Sam to offset the deficit. But there’s always a large gap between theory and practice. So maybe the hundred billion-dollar question isn’t whether to eliminate a tax deduction, but whether to place our trust in the government.


On this topic, Duncan voices a sentiment undoubtedly shared by many of us. “That’s not a gamble I’m willing to take right now,” he says.

35 comments

duncan
it has been a reason to buy everytime for us

also to takr this away now when housing is so weak will just do more damage

JS

@jorsmith@aol.com,

So you are saying that one of the reasons that a person would choose to spend HUNDREDS of thousands of dollars is for the opportunity to "save" a few thousand?

I don't quite follow that logic.

I say phase it out. While I enjoy the benefit, I don't see how the federal tax code has anything to do with whether or not I own a house. Don't I get service from the department of defense, EPA, congress, etc. whether I rent or own? Don't just eliminate it outright, but phase it out be reducing it 10% per year for the next 10 years until its gone so its not a shock to the system which is currently strained pretty badly. If localities want to change tax code based on homeownership, fine, but the federal income tax is not the right place for it.

i have mixed feelings. On one side I don't like to give subsidies to banks. They already get a free risk ride with Fannie/Freddie backing pretty much everything, and get their money at 0% to boot. On the other side, its a tax break everyone can partake of, if they want to own. Remember, folks who don't have children or are single still pay property taxes to provide for all sorts of services other use.

Most people who own live in houses that have mortgages of $500K or less--why not limit the deductible interest to the first $500K of any mortgage?

I think interest on second homes is deductible--they should definitely get rid of that.

I agree cut it in half to $500,000 tops instead of a Million. And cut every tax break by 1/2 as a general rule.

Giving more money to the government is like trying to cure an alcoholic with a case of whiskey.

just keep my check in the box.

While the tax deduction may not be in the top 5 "reasons" it is a significant factor in the sales PRICE since most buyers are really buying the monthly payment amount and the tax break reduces the payment by about 20% in most cases. If it is changes it defineitly needs to be phased out otherwise the shock would have too great of an effect on the marketplace.

If they did eliminate it you would see people form llc's and buy the house as a rental and rent it to themselves and then write off the interest as a legitimate business expense.

The other thing is that there is no way this Administration will use any found revenue to pay off the debt or offset andy current programs, they will spend it before the check clears on something new.

The 100 billion would probabaly be about two billion after you factor in the loss in taxes from property value decreases, and the loss in value due to the people who see no advantge to buying over renting, and the loss of jobs as fewer homes change hands.

If they really want to increase revenues then they need to make it so that there are immediate write offs for settllement costs (recaptured when sold) and new mortgage instruments that allow people to quitclaim and pay off the loss over time to compensate the bank if things go south. This would get the houses turned over quicker which keeps many many people employed.

The government makes money when the houses change hands quickly as the transacations involve everyone from apprasiers, realtors, bankers, termite inspectors, home inspectors, surveyors, movers, elecricians, carpenters, plumbers, landscapers, furniture retailers lawyers etc etc

Eliminating this deduction will slow and depress sales even more when what we need to do is to spur them.

@ Tim Taylor: I agree, and I think it is foolish *not* to factor in your tax savings when calculating how much you can afford to spend on a house.

And of all the goofy things our government subsidizes, I think home ownership is one of the better items that positively impacts middle-class society. I'm definitely in favor of the deduction.

At least one thing seems to be clear...commenters agree that the mortgage interest deduction is, in fact, a subsidy.
And it's one with a hefty price tag. And it's one that benefits most those with the most money, since the interest deduction extends to mortgages of up to $1 million and can be used on two homes simultaneously.

There was a time when the subsidy was not capped at $1 million and could be used on multiple homes. That's been pared back, deservedly so. It could be pared back more too, as commenter Sam (above) notes. Or, it could be eliminated entirely.

As usual Tim Taylor engages in specious thinking, saying that the interest deduction is somehow factored into the sales price of a house. Tim...go back to school.

Taylor also makes the absurd speculation that the Obama administration would not use wisely any revenues gleaned by eliminating the interest deduction. Taylor says the administration "will spend it before the check clears on something new."

I guess Taylor wasn't paying attention when George W. Bush implemented supply-side tax cuts for the wealthy that squandered a several-hundred-billion-dollar surplus, and led to huge budget deficits. Maybe he wasn't aware that Bush took the nation to war in Iraq on the basis of falsified and woefully wrong "intelligence," badly managed that war and the war in Afghanistan, and refuse to pay for either one (the price tag is about $2 trillion and counting). Maybe Taylor doesn't know that Bush bailed out the big banks that caused the financial implosion and tanked the economy with a nearly trillion-dollar subsidy.

Housing prices are still declining many places. Lower prices will stimulate sales (if willing and able buyers can get loans, that is.) That's basic economics, Tim.

I would like to know how they came up with $1227 as the average savings to a household with 50-75K annual income. I have a mortgage for a house <$200,000 and my annual savings are about $3400.

Democracy says:

"Housing prices are still declining many places. Lower prices will stimulate sales (if willing and able buyers can get loans, that is.) That's basic economics, Tim."

It seems like you are saying that if we eliminate the deduction it will lower prices to compensate for the subsidy... and I agree.... but it will not stimulate sales since the prices will only lower down to meet the same mortgage payment the buyer could afford if the deduction were still in place.The banks will only approve what people can afford and if their taxes are increaed by 200 bucks a month because they lost the tax break than that comes off of the top line of their income. It would have a chilling effect on the market as people chose to not sell at the lower price, their equity ratio is less or they become underwater. When housing sales slow the economy slows.

But Obama does need the money to bail out his solar glass company giveaway....

Perhaps it is you who needs to go back to school.

The mortgage interest deduction also favors new buyers strongly (and gooses the economy) since so much interest is front loaded. I know when I get a substantial refund (on a sub-500k mortgage), that's basically my home-improvement fund for the year. Some people take a vacation, pay of debt, etc. I think eliminating the deduction would be a huge mistake unless it is for luxury mortgages or 2nd homes.

I'd love to see the Fair Tax, or any consumption tax, enacted and then we wouldn't need all these write-offs and credits, nor the IRS. But I dream...

Todd I never thought I'd see it, but I think the political environment is as ripe as its ever been for tax reform. It's the only way I see out of the debt drama crisis since Repubs have boxed themselves in with their constituents about "no tax raises" and we can't cut spending enough to close the hole without seniors rioting in the streets so the "win-win" scenario is to get rid of deductions and make it seem like a "tax cut" with all of the deductions going bye-bye.

The housing market is in the dumps, so why not eliminate the mortgage interest deduction to drive it down still more? That way, new home construction will be reduced even more with the side benefit of driving the unemployment rate up. Of course, this would actually decrease government revenues, which is (this time I'm serious) good because that means less money for them to waste. Of course, (again I'm serious), this is the absolute wrong way to reduce government waste. Cutting spending is much better but many politicians, ESPECIALLY DEMS, don't believe in cutting spending. They'd rather increase spending and borrowing, i.e. double down on stupid.

Sick of Dave,

"I have a mortgage for a house <$200,000 and my annual savings are about $3400."

Thats probably because you are forgetting that you are taking that total off your income for AGI, not your actual tax bill.

It will never be eliminated. There are too many homeowners who would be more that a little upset to see the value of their house drop by 10% overnight.

If youi have a 200k mortgage and the amount you write off is in the 28% bracket the interest on the 200k mortgage is about 10k so the savings would be 2800. If your top rate is 34% then it would be 3400.

We are in one H of a financial mess spending 1Trillion+ more than we have this year. We are going to have to cut like the Republicans want, raise taxes like the Dems want, and stop the wars like the 4 old peace niks want down at the Federal building. I don't see the Repubs raising taxes, Dems always go for cuts in the far future but nothing now. Somehow we are going to have to do what both sides don't want or face the Chinese deciding for us. (not buying more debt etc.

The guy said his Mortgage is under 200k bill, and no one is in the 28% tax bracket at 75k right now. In fact, married couples are at 15% right up to 67k. So, your hoice of brackets right there takes your math off course. I will say though, that single childless people are really getting reamed too, especially self employed ones, because the ability to fund your IRA starts getting reduced in the mid 50k range. Yet, look at how many single person households there are now. Take the mortgage tax away, and you pretty much kill the incentive for anyone who might have some extra change to even think about buying a home.

Or to stay in this country permanently. At least in Europe single people get something for their tax dollars. In the US, they get to pay for everyone's baby, and everyone's war. And why don't they have kids? Well, gee, they can't afford to, because they are paying for all of that, while getting nothing for their money.

No, as much as I get annoyed with the subsidies to the banks on this, it has to stick. I do think that it can be adjusted for the region you are in, so we find a weighted amount for what you can write off. There certainly shouldn;t be any more of this break to 1 million dollar homes. Cut it to 300k, adjusted for average real estate prices in the regions.

Caseonia did you factor in the 7% state rates?

And there are plenty of couples who make more than 67k.

This will only happen when the tax code is revamped to eliminate all deductions, both personal and corporate, and a fair tax is finally instituted to make tax collection fair for everyone regardless of income, or lack there of!

There may be couples who make more than 67k combined, but the stat says 50-75k. My point was to be consistent, and compare apples to apples. Couples filing together at 75k would not be in the 28% marginal tax rate, nor would the single, though the single is paying a higher % of their income. As usual. Even though they have all the same expenses.

State rates are too variable, and regions are too variable - look at the difference between the Charlottesville and Albemarle - to get into too many comparisons there. Nor was the article referencing them, they were pointing out the Federal code.

What,f course, is important to remember is that the fact that we do pay state taxes and local taxes is important because most of those tend to be more regressive, and show how the middle class, is yet again, paying such a high % in taxes.

Most homeownwers that were smart enough to buy something affordable cant itemize enough to exceed the standard deductions offered as crumbs to the middle class.
The taxation debate at election time always focuses on the federal income tax and ignores the multitude of state and consumption taxes paid.
What has been revealed is the extent of state and federal reckless spending now that it is not supported by decreasing tax revenues due to mass unemployment.

"A government that attempts to tax itself into prosperity is like a man standing in a bucket trying to lift himself up"

and show how the middle class, is yet again, paying such a high % in taxes

"percentage" is only a portion of the equation.

20% of 50k is 10 thousand dollars.

15% of 200k is 30 thousand dollars.

Also the government is spending about 15k per person (60k for a family of four.)

and that doesn't include 15k per kid for schooling....

"fair" is relative.

The middle class even as a group don't come close to paying their "fair share" if we look at splitting the check by numbers or consumption.

Progressive taxation was founded on the principal that able bodied americans WANTED to work and that the freeloaders were few and far between. Those days are long gone.

fair tax, fair tax, fair tax- oh crap, then the IRS would have to lay off all those people, accounting firms would go bust- "oh, the humanity...."

And 50k, is 25% of 200k, yet the 200k earner in your example should pay only 3 times as much in taxes, though they earn 4 times as much money. Even in a flat tax world, that would be clearly seen as ....unfair.

What you seem to be grossly in denial of, is that those who make the 200k are able to make that money as a result of the developed and economically sophisticated community they live in; with roads, bridges, policemen, educated workforces, so forth and so on. The idea that you should not have to substantially contribute to the community that enabled you to make such a nice living is at best churlish, and in its worst cases, criminal. However, in this case, I think the 200k household, which is certainly well off, is still within the middle class tier, albiet the upper part of it.

The idea that the average person in America has become a lazy person who doesn't want to work is a big lie perpetuated by those who stand to benefit from turning working folks and individuals in the middle class against each other. I don't know too many lazy people, and I understand their anger as they work harder, have watched their wages stagnate and real income decline, while Wall Street gets trillion dollar welfare and continues to swallow all the gains in our economy that has come from the working persons productivity.

Th idea that a single person unable to find full tie work is paying a net federal tax rate because they happen to not own a home, while the 200k person gets to sock money away in employer provided tax havens, is absolutely preposterous. It is entirely possible the 50k household can have no tax obligation while the single earner at a much lower rate does.

Personally, I am tired of paying for everyone's baby, and everyone's war.

"What you seem to be grossly in denial of, is that those who make the 200k are able to make that money as a result of the developed and economically sophisticated community they live in; with roads, bridges, policemen, educated workforces, so forth and so on."

So the people who did not take advantage of these resources are VICTIMS?

There are services provided by the government with the taxpayers paying the bill. The poor, middle class and disadvantaged are the primary recipent of these services. The wealthiest 25% pays 85% of the bill. And that are just taxpayers... there are millions more who recieve government benefits and pay nothing.. Why are you not mad at them? Do you really think they all cannot find work or are put down by "the man" .

And wages have not stagnated except on paper. the reality is that working americans have a higher standard of living than EVER (unless they are in the group that got burned in this recession) 25 inch TVs are 200 bucks. Laptops that used to be 2500 bucks are 399.

Non designer clothes are cheaper. food is avialable at decent prices if you shop and the choices are more plentiful than ever. Cars are more expensive to fix but they are safer and more fuel efficent. Healthcare advances are phenominal in the last 30 years. It SHOULD be more expensive because you get more.

Education is more expensive because it has become a haven for progressives to live off of government grants and should be reigned in.

Besides that, people who make a lot of money and spend it are contributing through other taxes. They are not villians. If anyone has ever purchased anything at a yard sale or a used car they are enjoying trickle down economics. Somebody bought all that stuff new at some point.

You can either divide the check by the number of diners or the size of their meal but to keep handing the check to the guy who has been throwing down 85% to start is just plain wrong.

You can make an argument for nessesity because the other sources are tapped out but the word FAIR is not applicable.

"The tree of liberty needs to be watered from time to time with the blood of patriots and tyrants"

"Taxable Income" is the IRS target, the more you make, the better the accountant you can hire, the less taxable income you reveal.

Life is like a sh!@# sandwich, the more bread you have, the less sh!@# you have to eat.

Bill,

"there are millions more who recieve government benefits and pay nothing.. Why are you not mad at them?"

I don't read that people are not mad at them, I read that some people, unlike yourself, recognize that welfare is not just what the poor get. People are mad that companies like GE pay no federal taxes, yet someone making 20k a year most certainly can and does pay federal taxes. I certainly don't hear you squalling about that here. Why is that? Why aren't you vociferously ranting about the GE Halliburton Exxon Mobile welfare handouts in the form of tax breaks, that I am quite neither of us qualify for? Is it because they don't have faces? Because they don't have a color conveniently associated with them?

"So the people who did not take advantage of these resources are VICTIMS?"

Now thats funny. I have to think that therein lies that majority of the Tea Party.A bunch of people who deep down, no matter what they claim, feel they are being victimized. Especially the white males. They have watched their income and living standard get whittled away, and they need to blame someone who is easy to see. They can't see GE, so it can't possibly be them, even though it is GE who is sending another 20k of their jobs overseas while paying no taxes. It's easier to see the person on the other side of town. But all you have to do is look at the enrollment in college, and hear the anti-intellectual rhetoric from these groups, and you begin to ask, as you just have, " Are they really victims for not taking advantage of these same resources?"

So the Koch brothers tell them to keep looking at the person across town, while ignoring GE, and whittling away even more at their ability to have a voice in their own government.

Personally I don't like any kind of welfare at all. I think the best solution is getting people skills and having real jobs, and companies providing goods and services in a global economy that people want to buy. I don't think that cutting some food stamps is going to do that, and I don't think handing out giant tax breaks to GE is going to do that either. All you have to do is look at the US economy in the 1890s to see that.

"If anyone has ever purchased anything at a yard sale or a used car they are enjoying trickle down economics. Somebody bought all that stuff new at some point."

Now that's just ridiculous, Bill, and I expect better than you on that. The reason the economy is slow is that the majority of the buying public, most of whom are not truly wealthy, are tapped out. Companies aren't creating jobs, because there isn't that much demand, and why isn't there that much demand even if Wall Street has been doing OK? Maybe because the wealthy don't actually really purchase enough after all. Because the majority of Americans - not wealthy - are making their stuff go a few more years right now.

The idea that trickle down economics is about buying used stuff at garage sales as a wonderful benefit really demonstrates a deep lack of economics understanding on your part, driven now, I see, but some underlying meanness. That's right. Mean.

Its mighty close to Marie Antoinette and her statement of " Let them eat cake." You remember what happened to her, right?