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.
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.
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!
I've been intimately involved in the housing market since 1988 as a residential plat development consultant as well as a several time home owner. If anyone has a vested interest in the mortgage interest tax deduction it's me. Depsite that, I'm all for eliminating it.
This deduction does a number of things that I think need to be corrected:
1. Skews the housing market by encouraging over-investment in what has always been sold as an "investment" but that is really consumption. It's not much different than buying a car except that, for much of the time anyway, it doesn't depreciate like a car. Still, it's consumption. This over-investment contributed to the housing crash and, subsequently, the near complete collapse of the financial system. It also contributed to a misallocation of capital from real investment, i.e., production, to consumption. Finally, this all resulted in a massive mis-direction of skilled labor to the housing sector. Skills that should have been developed in production were mis-developed in an industry that may not need those skills in that volume for several years.
2. Involves the government and "the public" in rewarding one group of folks, home owners, over another group, renters. In my view it's none of my business how folks decide to accommodate their housing needs so it shouldn't be the federal government's business either.
3. Subsizes one group of taxpayers, home owners, who tend to be more affluent, at the expense of another group of taxpayers, renters, who tend to be less affluent.
Although in the short run elimination of this deduction will likely result in some downward pricing pressure in the long run it would benefit the overall economy by helping to reallocate wealth toward productive investment and treat housing as it should be treated, a personal lifestyle choice.
You can jack up corporate taxes all you want --- YOU WILL PAY IT. A corporation is a cost pass through entity for taxes, regulations, and any other government policy you want to implement. It is by nature a psychopathic enabler for collusion by government and economic forces to impose all sorts of costs on everyone.
IF YOU WANT TO STOP IT --- WITHDRAW CORPORATE LEGAL PROTECTIONS FOR ALL "STAKE"HOLDERS.
You would be amazed at how many progressives and so called caring individuals will run from this. They are all in some manner, hopeless "STAKE"HOLDERS" prepared to look the other way while their favorite non-profit or PAC engages in mass externalization of costs on everyone including the very cause the entity purports to nurture.
Also if you havent noticed, there are discussions being floated to tax 401Ks,IRAs, transaction taxes on financial activity on a global basis.
Folks, there is 42-65 TRILLION $, depending on whos numbers you subscribe to, in unfunded liabiliies/entitlements ahead of us. The politicians are looking for anyplace they can loot the public wealth.
The so called middle class is being duped into believing thay are insulated from this not so subtle confiscation of YOUR hard earned assets.
do it incrementally over a period of time and maybe allow it for first time home buyers. Canada has no deduction, requires a 20% down payment,has a higher % of home ownershipn the U. S., and didnt suffer the meltdown we experienced.
Current artificialy low interests rates are building for another bust and liar loans are back.
The article says the possible tax deduction change is needed to address fiscal issues. The tax deduction didn't cause the current fiscal issues as it has been in place for years prior to the current fiscal issues so the deduction shouldn't be changed. Changes should only be made to situations which caused the current fiscal issues. Changing the tax deduction is just a way of covering up other problems and/or changing tax revenue streams to benefit others and/or hide bad policy decisions and/or to fund bail outs which nobody would have voted to approve. Getting more and more difficult to put any value in fiscal life planning when changes occur frequently which have huge impacts on fiscal life planning. Why bother planning...
A tax deduction change would have less of an impact if it only affected new buyers who were aware of the change going in to a purchase rather than affecting peoples current fiscal life plans.
We could easily get the money we need by stop spending outside of US for 1yr.
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.
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A basic income policy can actually ensure a decent standard of living for everyone.
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