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 30, 2012 4:21PM

my feeling is, no one, and I repeat no one should receive more money back than they pay into the IRS. 


Factoring in the deduction in buying should not be a factor to use, this is why we had such a balloon effect in home costs.  It's not always a bad thing to rent.


Nothing wrong in being a rental nation.


Nov 30, 2012 4:17PM
as one person commented, at what expense does a break for one person have on another. 
Nov 30, 2012 4:04PM

THEY NEED TO RAISE TAXS ON ANY ONE MAKING OVER 100,000 A YEAR . AND RAISE THE RATE UP RATE 2 POINTS, EVERY 200.000. STARTING AT 25 % up to 50%. i bet we would end the dept in america. greedy rich people.

Nov 30, 2012 3:59PM
I am NOT wealthy by any means. My income is being erroded on a daily basis. Take away this deduction, then what? For goodness sake, tax all the off shore accounts that the Bainers are hiding their money. Anyone with over 10 million in liquid assets certainly doesn't keep it in the USA. Ya' think Ohrah and the rest keep their dollars here? Think again! The middle class is a dying breed. Maybe because the world just go too populated and human life is expendable. They know there are millions out of work and they will work our jobs cheaper, longer, better....
Nov 30, 2012 3:43PM

The Fed has a 0% interest rate set for the banks and giving them free money and costing the tax payers. Yes stop the deduction and stop the free money to banks.

Nov 30, 2012 3:33PM
Haha! Wow, I'm long winded.  I should totally start a logic for life blog.  I bet there are a good many of those.  Read my previos post and if you would read a topical blog by me, like this comment.  Maybe I'll do it in those slow times at work. 
Nov 30, 2012 3:31PM
Getting rid of the mortgage deduction would kill the middle class
Nov 30, 2012 3:31PM

It is an "unfair" deduction as are many that people are told they can get. 


Here is the problem with deductions.  Every. Single. One. is flaunted as a tax deduction.  People are told, "you can deduct that on your taxes!" When the reality of it is, you might be able to if you itemize. 


Churches "Your tithe is tax deductible!" (Don't get me started on the Biblical consequences of taking from Caesar to give to God)


Banks "Your mortgage is Tax deductible!" (OK Now that is an outright lie, but SO MANY times I've heard clients complain that I did it wrong.  Mortgage INTEREST is deductible)


The thing is, unless you are spending a pretty good amount on these things, it is better (not required) to take the standard deduction.  For many years I heard these things, and I know people believe them, while my income was less than the standard deduction (= Taxable income of 0). To itemize would have meant I have to spend MORE than my annual income at charities, medical problems, or certain work uniforms. 


I've been aroung people who were talking about this purchase or donation they were making, and the rationalization is that they can get it deducted from their taxes.  People you've got it all wrong.  These deductions actually reduce INCOME, not taxes, and are subject to ceilings and floors.  And if it is deducted from your income, you're getting a percentage back from the IRS.  Throwing good money at things for a deduction of a maximum of 35% of what you throw. 


Look at this. 


Standard Deduction 11,500

Total Income 111,500.00

Taxable Income 100,000.00

Tax bracket 35%

Tax 35,000 


Donation to a charity so you can pay less in taxes 10,000


Income you can use 90,000

Tax 35,000

Charity + Tax =45,000


What yo really have to spend for all of your stuff at the end 66,500. 


That's 59 % of what you earned.


NOW imagine now that you're able to itemize.


Total income 111,500

Itemized deduction 21,500

Taxable income 90,000

Tax bracket 35%

Tax 31,500


Cost of deduction 21,500

Savings 35000-31,500=3,500

So you spent 21,000 to save 3,500 on your taxes.


And for consistency,



53,000Total Cost


111500 Incom

-53000 Total Cost

58500 What's left at the end (Your spending money)




WAIT... Your financial situation is WORSE?  Yeah, it is. So if you don't actually believe in the work your money's going to, I wouldn't spend it. Don't get me wrong, DONATE, support the things you believe in.  Just don't do it for the purpose of getting a better refund in April. 


The deductions are intended to support nonfinancial agendas.  The government gives a small subsidy to you to participate in keeping the nation up.  You know, by supporting local charities or the like.


Which, you should be doing for your own good.


Next time you hear, "it's tax deductible!" your response should be, "So?"


Now the mortgage int thing, it really should be available to all homeowners, or none.  I'm middle class and a homeowner, but my interest is too low to deduct.  Over time, you start paying less interest, so eventually it goes away for everyone, I won't build you an amortization schedule to prove that.  It used to be one you could take without itemizing.  That's the most fair.  But All or None.



Nov 30, 2012 3:30PM

With the last election results in the bag the Obummer gang of 40 Czars can do what ever they want and know that the people who reelected them aren't a threat. this regime. Obummer  fooled so many people with promises of obummer phones and obummer welfare the 2013 Welfare checks should use the lame duck POTUS picture as a logo and not the federal seal. BOHICA will be the new US motto for the unwashed  masses of freeloaders crying WTF happened to my welfare check and free healthcare I was promised if I voted for the democratic party's empty promises Don't worry because the homeland security has recently promoted 234 new FEMA Blue shirts to defend Washington DC with the billions of .40 hollowpoint bullets and the hundreds of 300,000.00 armored vehicles.

Nov 30, 2012 3:25PM

Stupidly Suicidal for the economy!




Nov 30, 2012 3:20PM
Barry needs mo money, mo money, mo money!!!!!
Nov 30, 2012 3:18PM
Many Democrats live in Public Housing at Uncle Sams expense so they are happy that this won't affect them.Just keep their food stamps,WIC,Medicaid,food handouts,school lunches and free cell phones coming and they are happy..
Nov 30, 2012 2:53PM
One thing that this article does not consider is the effect of state income & real estate taxes.  This article says you need a $350k mortgage to top the standard deduction amount.  However, that assumes no real estate taxes or state income taxes. 

As a CPA for 28 years, I see almost a thousand clients a year.  Most are able to itemize.  Here in Illinois, the state income tax rates are 5% of AGI, with very few adjustments.  So a married couple with $100k of AGI would pay $5k in state income taxes.  Furthermore, in most counties in IL, a $200k home will generate real estate taxes of $4k to $8k of real estate taxes.  These two items alone put most people over the standard deduction, not even including the charitable contributions that people make.  So the actual number of people who are able to itemize due to home ownership are far greater than this article infers. 

Nov 30, 2012 2:49PM
I will be very upset if they remove this deduction completely.  I am a single homeowner with no dependents, so this deduction is pretty much all I get.  I am able to itemize when I include it with my charitable deductions, property tax, and other allowed deductions.  I don't get a huge refund by any means (between $800 and $1300), so that $400 or $500 I would be losing really matters.  I use that refund to pay for the septic system service contract, operating permit, and system supplies that my county requires each year as well as for any non-emergency repairs needed.  If they want to lower the limit on how much interest you can deduct, I don't think that would affect the middle class much.  How many middle class homeowners deduct a million dollars in mortgage interest anyway? 
Nov 30, 2012 2:46PM
Yep, end the mortgage deduction along with all other deductions and replace it with a 15% flat rate that everyone pays, including the poor.
Nov 30, 2012 2:46PM
Our government has TOTALLY mismanaged our country's finances and now play games with our future.  If Obama had his way, the mortgage interest deduction would be eliminated.  This way, home ownership would be unaffordable for the middle class.  Destruction of the middle class is his agenda.  The lowest 20% of wage earners/non-earners would control the balance of wealth in this country. 
Nov 30, 2012 2:40PM

Knowing Boehner and his tendencies to hurt the American people any thing is possible including killing the Mortgage dedudtion.


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!

Nov 30, 2012 2:38PM
If they do this, it will lead to more houses on the market for sale, sky high rents, more families on the street and more retirees in motorhomes/RV's.  The latter is where I will be.
Nov 30, 2012 2:30PM
it is not a tax break.  the banks have to pay income on the revenue paid to them in the form of interest.  it is just another example of our crooks in governmane trying to double tax on the same money
Nov 30, 2012 2:28PM
kill all deductions and tax billionaire 50% on thier net worth. 
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