Mortgage deduction on the hot seat

Homeowners love the mortgage deduction. So do real-estate agents and homebuilders. But it costs the government billions in lost tax revenue and may be trimmed back to fix the fiscal-cliff problem.

By Charley Blaine Nov 29, 2012 4:57PM
Let's start the inquiry with a stark question: Is the mortgage deduction a goner? No, not yet.

But it is being talked about in the context of fixing the fiscal-cliff problem, and it is one that all homeowners with a mortgage probably should be watching. But a legitimate question is whether the mortgage deduction is morphing into a tax break only for the affluent.
There will be a big, loud fight over the mortgage deduction because it has been one of the most cherished of all tax breaks.

Here's what makes it so popular:

If you buy a house with a $150,000 loan at 3.5% annual interest (the current rate on a 30-year fixed mortgage), you will pay $5,204 in interest. If you're in a 25% bracket and you itemize, your income tax bill drops by $1,301.

This assumes you can itemize deductions on your tax return. In 2012, for married couples filing jointly (which is most of us), your total deductions must exceed $11,900, so make the effort to list out charitable contributions, property taxes, state income taxes and the like. The IRS hasn't yet announced the standard deduction for 2013.

Here's why asking if the mortgage deduction is turning into a tax break simply for the affluent. Mortgage rates are down 43% from the 6% level that prevailed in 2007. That means the interest paid on a new mortgage is now much less.

So, let's say you're buying a house and want the mortgage interest to top the $11,900 threshold. That means you need a mortgage of around $350,000. That might not buy you much in New York, Los Angeles, the San Francisco Bay Area or Washington, D.C.

Nationally, however, the median price of an existing home in October was $178,600, according to the National Association of Realtors. The median price of a new home in October was $237,000, the Commerce Department reported on Wednesday.

In 2007, when mortgage rates were around 6%, the interest you would have paid on that $150,000 loan would have been $8,950. In 1982, when mortgage rates hit 15%, your interest in the first year would have been $22,500.

Fact is, as of 2010, only 25.8% actually claimed the mortgage deduction, deducting some $387 billion in the process, according to the Internal Revenue Service's Statistics of Income. That percentage is down from 28.8% in 2006, just before the housing bubble started to burst. And the number of taxpayers claiming the mortgage deduction fell by 10% in 2010 from a peak in 2007. 

OK, the percentage who claimed the deduction in 2011 may be up a little, and it may rise again in 2012 as evidence mounts of a housing recovery. But lower interest rates are clearly limiting the value of the deduction in much of the country, especially for new homeowners.

If that's the case, why is the mortgage deduction defended so fiercely? The short answer is you have always been able to deduct the interest on your house under the IRS code. And, especially since World War II, one of the key selling points of homeownership has been the deduction.

Another has been the potential for capital appreciation. A third -- though less talked about -- is the fact that paying down a mortgage is a form of saving.

The deduction is in fact capped. You can only deduct up to $1 million in mortgage interest on one or more homes and up to $100,000 on the interest on a second mortgage.

The mortgage deduction has been used to promote homeownership, believed to be an important American value because it promotes economic and social stability.

It also gets a defense from Kevin Villani, former chief economist at Freddie Mac. Homeownership and the buildup of equity in the home have been important sources of seed financing for small business.

The case against the mortgage deduction is that it historically has favored one group of taxpayers -- homeowners -- over renters. The United States is the only industrialized nation that gives homeownership such tax treatment.

And critics, mostly from the right, say the mortgage deduction draws capital away from new factories and equipment and into the construction of big suburban houses.

An important question is whether junking the deduction would make much difference to homeownership rates.

Hard to say. BusinessWeek says it was 62.5% in the second quarter, after foreclosures and delinquencies are taken out. That's down from a peak of 68.3% in 2004 and 2005.
The decline has everything to do with the housing bust and falling prices.

The odds are that the deduction will survive in a world where itemized deductions are capped. Former Massachusetts Gov. Mitt Romney proposed a $25,000 cap on all itemized deductions during the recent presidential campaign. The Obama administration is warm to the concept if not the amount.

Republicans want to discuss the idea as part of a broad tax-reform package. But no one has actually put much on paper. And that's scary to Kenneth Rosen, who teaches real-estate economics at the University of California, Berkeley.

The problem isn't reform. The problem is that the tax code is so huge and complex that quick changes cause more problems than they solve, he says.

Case in point: The 1982 tax reform package promoted by the Reagan administration. The law created so many tax breaks for commercial real estate that money poured into the sector. Within two years, the law had to be amended to cool the business off.
Nov 29, 2012 7:20PM
It's the last deduction that most moderate income people have. They took away all of the interest deductions that once were allowed. Why don't the POLITICIANS cut there salaries and benefits to help stop the fiscal cliff? There not about to change there life style. WHY DO WE CONTINUE TO SUPPORT COUNTRIES THAT DON'T GIVE A CRAP ABOUT US? WE NEED TO KEEP OUR TAX DOLLARS IN THIS COUNTRY.
Nov 29, 2012 6:47PM
Renters DO benefit from it.  If landlords lose the tax break, rents will go up.
Nov 29, 2012 7:27PM
I'm all for simplifying the tax code, to the point that we get rid of all deductions, credits, etc... and either go to the Fair Tax or a flat tax.  But just jacking around with 1 deduction in a sea of 77,000 pages of tax code is stupid.

Tax policy should be used for one reason - to obtain revenue to fund the gov.  But that's not what we have anymore.  90% of current tax policy isn't about generating revenue - it is simply just a way to control behavior or to gain political advantage.  If the actual goal was really just revenue, our tax code could be less than 50 pages.
Nov 29, 2012 6:57PM
This  once agian hurts the middle  class!!!!! especially those of us that  have  had morgages  more than 10 years, didn't default or short  sell but struggled through to pay up and did without  many things to keep  the roof over our head and a home for our families.  This hurts the group that  bought houses  between 75,000 and  200,000  in small towns that make up much of middle  America.  It does not  hit the ones at the top who make 200,000 + because they  can  shift  funds around  and not do with out  or  risk their families home. The actual amount that the government  would get from this group  isn't going to make  much of a dent.  It may be  needed  but needs to be phased in very slowly over a long period of time to give those of us hanging on by threads time to plan ahead, and it needs to be combined  with a much more understandable tax  code  with far  fewer breaks that  can only be used  realistically by the upper income  brackets.  If you don't have enough  money left  after  paying  the costs of  food  shelter  and clothing ( never mind education or health care) then  you  don't have much left to buy  the things that produce  tax breaks.
Nov 29, 2012 6:39PM

Using the same 3.5% loan interest number stated in the article on a $500,000 loan amount, the interest is $17,500 per year, and in a 25% tax bracket the deduction is $4375 per year. If you take states like CA, NY, MA where a $500,000 home loan is close to the AVERAGE loan, a lot of households will be hit hard.


The mortgage tax deduction should not be changed. People buy their homes based on the deduction and factor that in to their decision to buy. Removing the deduction is changing the rules midstream. If done, people will be forced to sell.


This tax, along with the $200K/$250K limit proposed for tax breaks could put a tax increase of $6K/year on thousands of homes in CA, NY, MA, etc.


When will it stop? This administration won't be happy until we are paying 50% of our earnings in taxes. After all, that's fair right? Why should people get to keep anything over half of what they earn? That just wouldn't be fair to the government.


It will get to the point where it just won't be worth it to go to work, and that's exactly where this administration want's us to be. 

Nov 29, 2012 7:37PM
Great idea. Let's take our country's most important industry and completely flush it down the toilet while it's barely starting its recovery. What could go wrong?
Nov 29, 2012 6:38PM
It will be crazy and a disregard for the middle class homeowners if they get rid of this deduction.  This is one way the middles class wants to buy their houses so take advantage of this deduction at the end of each year.  Getting rid of this is like an insult to our way of life.
Nov 29, 2012 6:41PM
That's about all that is left for deductions for the middle and lower income people.  Soon there will be nothing allowed for deduction for the middle and lower income people.
Nov 29, 2012 7:42PM

Having the ability to use a mortgage as a tax write off is a good one. This type of tax write off truly stimulates and encourages purchasing of a home in which has a huge impact on other buying of goods / services in our economy.


All of us should be asking our government officials why they are not looking first at their compensation and health package to reduce cost and so called spending. Talk about entitlement programs; start with the low life's in government that are killing this country.






Nov 29, 2012 7:13PM
The commentator comparing this deduction to the credit card interest deduction is clueless.  Carrying a balance on a credit card and paying interest is utter financial stupidity.  However, taking a mortgage on a home is considered "good debt" (or at least used to be).  Removing this deduction will collapse the already horrendous housing market.  There will no longer be an incentive to build that new home of your dreams.  This will also put the final nail in the casket of many struggling home builders nationwide.   
Nov 29, 2012 6:24PM

If they get rid of the mortgage interest deduction, both owner-occupied and investor real estate will completely collapse.unless they also eliminate the income tax.  Repeal the 16th amendment.


Not only will people not buy, they won't pay their mortgage payments because everyone with a mortgage will be upside down.


The commentators are idiots.  This is in no way comparable to credit card debt.

Nov 29, 2012 6:52PM
I do not give to charity any more. I can't aford to.
Nov 29, 2012 7:09PM

How about going back about four years when President Obama suggested taxing the Mcmansions?  He must have forgot when he said he would tax homes on square footage over 2,400 square feet.  That would bring in some money. 


I would like to suggest another one that would bring in more money.  How about making the standard deduction for kids limited to two?  Why should the taxpayers pay for those that want to have more than two kids?  Think "19 Kids and Counting" and let them pay for the rest of the gang. 

Nov 29, 2012 6:52PM

Removing the home mortgage interest deduction will cause major headaches to the IRS. Purchasing a home is no different than buying stock on margin, buying a business on credit, or buying a rental property with a mortgage. The IRS has already declared ALL real estate to be an investment. Do you pay capital gains if you sell it at a profit? Do you get a deduction for it if you sell it at a loss? Yes you do. Thus, it is an investment and you are entitled to a deduction of the costs of financing the investment just as if you bought stocks or bonds on credit.


If they get rid of the homeowners deduction, I will transfer the property to a new LLC and rent the property from the LLC. I will then get to depreciate the building too!

Nov 29, 2012 6:42PM
Nov 29, 2012 7:44PM
I can just see those leeches frothing at the mouth over all of that "revenue" from eliminating the mortgage interest deduction. Not at all considering how much another collapse in the housing market, and the subsequent recession, will cost them.
Nov 29, 2012 6:48PM

The article says the mortgage tax deduction is becoming a deduction that only benefits the affluent.  So is that the case for throwing it out?!  How about lowering the standard deduction so that more people (with smaller mortgages) can itemize!  The arguement from the right for throwing out the mortgage interest deduction also includes implementing the fair tax.  How about reporting the whole story instead of always trying to throw an ideology under the bus...

Nov 29, 2012 7:37PM
What are the required skills for becoming a journalist?  A  digit IQ?.  A degree in stupidity?
Nov 29, 2012 6:42PM
How about getting rid of the tax exemptions for dependents? How many people claimed that and much would that bring in? Probably more than enough to fix their fiscal cliff dilemma.
Nov 29, 2012 8:37PM

It really pisses me off to hear about how the IRS is "losing" revenue by my taking advantage of the mortgage deduction. This line of thought means that they're also "losing" revenue by not imposing a federal sales tax, or by not taxing the 50% of my health benefits my employer pays for, or by not taxing the air I breathe. How does our government have the balls to tell us they're "losing" revenue just because they're not squeezing us even harder than they already are? I just really hate this rational for why those of that can pay more, should. Give me a good argument, and I'll pony up a little more to help out my country and fellow citizens. But don't tell me about how you're "losing" money because I bought a house! 







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