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.Read more on: mortgage interest deduction