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.
Boehner, again you keep youe abuse on the citizens that need your quick support!
Boehner, we the Democrats will remember you for ever as a persistent blocker of progress for our country, and we will work hard in the next elections in 2014, to kick you out of the House of Representatives. We will pursue this task with all our heart. Our prime future agenda is to consolidate our efforts to get you fast ejected in the next elections out of a job you did not know how to do efficiently, you did not earned it, and you do not deserved it as an American! We will make you invisible by jerking you out to never return because have done so much damaged to the American people, to our credit ratings during the Budget Ceiling discussions by so much indolent opposition against the president Obama. Unfortunately for the people of America your negative actions quickly ricochet against the middle class, stopping their opportunity for job creations, better economics
future, and less poverty. We still do not understand, and still we cannot mentally accept a man's in your position to be so weakly and wrongly leading this mass of incoherent Tea Party nuts, and Republican members, that with no excuse, were put there by the people to supposedly work with the people benefits, and for the people gains only, and not for you monetary growth, and big names in the House of Representatives. You made
yourself a detestable inhuman, we all deeply feeling sick just by listening to you bully unaccomplished voice always commanding nothing but despair, no jobs, no presidential Bills passed, future poverty, anti -health opposition for the citizens, you need to be put out of your job quickly and we can hardly wait for the next elections! You, and all of you have put us through misery, poverty, and no jobs, you have discredit our USA by not wanting to increase the Debt Ceiling when you kissed the rear of Bush, and increase the debt ceiling many times because you adore this man of poor and reckless presidential performance just like yours!
This is actually one of several Tools used that helped to cause the Housing Bubble to begin with.
Realtors use it as a Con to get people to buy bigger, More Expensive homes they probably can't really afford anyway.
When I bought a Home the Realtors continuously Pushed homes near double in price that I was looking for Spouting this deduction. The fact of forfeiting basic deductions for itemizing would actually have cost me more. They Didn't care.
Most Buyers neglect to check this out & only realize it after the Fact. OOPS. To Late. Your Stuck with it.
This actually Artificially increases home prices. Great for a Realtor or Home Builder who's incomes are based on percentages. Bad for the Consumer. This is mostly a Tax Break for the Top 90% & the Bankers.
These chuckle heads on CNBC are so out of touch. I'm a 50 year old engineer who owns a home. The MID was just one of the reasons that I purchased a home vs renting. For the folks on this show not to see how other AMERICANS look at the MID just goes to show that they are out of touch with what really goes on in this country. Many folks that I know use the MID to put away extra money for their kids education each year for other important items. Think the market was stagnant 2008-2011, take it away and you'll see the market drop like a rock.
From the trenches of America!
HA HA THESE PEOPLE ARE FUNNY.
They want to take your the intrest deduction and tax you an extra 4% on the sell of you property for obummer care. you guy voted this idiot in
The present system is so jimmy-rigged and loaded with loopholes and favors, nobody but the rich can make any good use of it. And that takes CPA's and Lawyers to accomplish, things that ordinary working people don't have the means to afford.
The sad part about this is that most underwater homeowners that are paying every month are paying larger interest 51/2 to 71/2 & this is a bomb being dropped on them.
This could put forclosure as their only option.
I read somewhere that obama administration is buying up more home mortgages and plans to rent their forclosures as Goverment
housing for the welfare state.
Does anyone know anything concerning this?
Everybody wants to fix tax rates and close holes but NOBODY wants theirs cut. HAHAHA. I live in my paid off home, live my life with 0 debts and plenty of cash put away. I watch the losers who asked for all of this, GET what they ASKED for.
Well there are many ways to skin a cat I guess. I would think that it wouldn't take long for many people just barely surviving on the financial edge to go the bankruptcy road. This, of course would have a horrible impact on lending institutions and credit card companies, but the loss of credit worthyness would stymie home purchases and certainly impact the foreclosure rate in the US. For people on a fixed income and seniors still carrying mortages (and there's a lot of em) it could be the final blow. It hasn't been very long ago that we we're going overboard to help low income families get into homes. One of the incentives to owning vs renting included the tax advantages, i.e. property taxes, mortage interest and other deductions. How would this impact those folks that have rental properties and depend on mortage interest, property taxes and expenses related to the property to hold rental prices at an affordable rate? There are no winners in this scenerio. What is being bandied about will only further complicate and exasperate our US overall financial crisis. They throw this rock in the water and the ripple effect will be incredible. It would seem that no one is thinking beyond a single issue when they throw out these balloons to gauge public reaction. Where are the collective voices of all of our educated econimists, common folks break out the power point presentations and pie charts.
Let there be no doubt folks, as a country we're in serious financial straights and all of our highly paid public officials and tax gurus are sitting in the corner with one thumb up their collective butts and the other in their mouths playing switch. WE have spent millions over the last eight years paying salaries of purportedly intelligent people who have done or suggested little to purpose solutions. We've bailed out our banks, our varied industries etc on the promise of a "turn around" that hasn't occurred. The only thing that has tangibly occured is the lowering of wages, elimination of benefits, reduced working hours, and drastic reductions in employment. Oh and now let's go to the Twinkie debacle. How? Please someone Please, tell me how, these incompetent, uncaring, greed oriented executives can expect golden parachutes after having scuttled a company and put thousands of hardwoking folks on the street. I know where they'd be if this was the Russia of a by gone era. But our own history reflects an earlier resolve to avoid taxation without representation. Wasn't there a revolution over that issue? HMMM, seems to me I read something about that. Oh yeah citizens let's now make purchasing guns and bullets a little harder for the average American.
I guess it's true, History has a way of repeating itself. The good news is this, we have the ability to learn from history. I don't begrudge anyone for amassing a fortne. Carnegie, Mellon, Ford and so many others did it and at the same time made a concerted effort to ensure that those who woked the furnaces and built the motors were adequately (for the times) taken care of. But as we continued to grow we lost sight of a lot of things and people kind of got pushed to the bottom of the list.
We all have a lot to learn. I remember ration stamps, I remember a new pair of shoes once a year just before school started. Patched jeans were pretty common, mother and grandma darned socks and knitted scarfs and mittens for Christmas. Brownbags and egg salad sandwichs were pretty common. Housing in the 40's was scarce and money was even scarcer. I joined the Marine Corps in 1957 and actually met young men/boys who had never had a new pair of shoes in their lives and eating three times of day was a brand new experience.
For you own sake, pay attention to what's going on. Don't let some millionaire politician dictate your life, the shoe should really be on the other foot.
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