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 7:40PM
i have a better idea....kill medicaid. it cost the us taxPAYERS $275 biilion/year to pay for the healthcare of people who dont pay theirs including FREE nursing home care/cant get that from medicare! kill the mortgage deduction? fine, kill property taxes! pay for schools with tuition and sales tax. that way, whores criminals and welfare rats can pay for schools too. why punish the taxPAYER who owns a property? start cutting the expenses that burden the budget instead of continued wealth re-distribution!
Nov 29, 2012 7:39PM
Here's a thought, stop letting Apple divert 100 Billion a year overseas to avoid paying taxes (as well as the rest of corporate America) and we stop having this discussion. It's not rocket science.
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 7:37PM
What are the required skills for becoming a journalist?  A  digit IQ?.  A degree in stupidity?
Nov 29, 2012 7:36PM
The article is wrong.  The deduction is not capped at $1.1 million of mortgage interest.  It's capped at the interest on $1.1 million of mortgage debt (substantially lower than $1.1 million of mortgage interest) and it's limited to two homes.  As far as the other armchair tax accountants commenting, mortgage interest on rental properties is something completely different.  It's not part of your itemized deductions.  Mortgage interest on investment property  is part of your itemized deductions, but it goes on a different line from the mortgage interest on your personal residence.  It also gets different tax treatment - you can only write off an amount equal to your investment income, any excess gets carried over.  There are different rules regarding the treatment of the sale of your personal residence vs a rental property and an investment property.  If you sell your personal residence at a loss, you do not get to deduct the loss as someone below stated.  While a flat tax sounds nice in theory, in reality it's a regressive tax meaning the burden is greater for those at the lower ends of the spectrum.  A really nice loophole to get rid of would be the carried interest rule which not only lets people pay capital gains rates on what is in essence ordinary income, but lets them escape payroll taxes as well.  But since both Dem & Repub congressmen/women take advantage of that loophole it will most likely not go away.   
Nov 29, 2012 7:34PM
For years people were told to buy houses to help improve their tax situation. It's one of the my reasons people buy a home. More people will rent if they repeal this. Who is going to want to buy a home? This will hurt all homeowners whether they are lower middles class to upper class. It seems to me that our country in going to hit a brick wall soon. I'm starting to think the crazy show Doomsday Preppers is now not so crazy! I vote Democrat or Republican, I'm not impressed kow with the way either party has been handling our country. 

Maybe we do need to hit a brick wall and start fresh, but I just hope it doesn't get too ugly. It's already sounding like it will be.
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 7:26PM
This article is an example of poor writing. It starts out implying that the deduction is on the hot seat and then changes toward the end stating it will survive. Too much nonsense and not enough information to back up anything. It is worthless to read!!!!!
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 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 7:12PM
If the interest deduction is removed, we would lose a deduction of $22426.00. Our tax rate of 18% would rise from $8760.00 to $12,797.00 and that is only if we stay in the 18% bracket.That is about a 31% rise in federal taxes and of course a rise in state taxes. Hopefully if this is passed, there may be a fixed amount that can still be deducted and the sting won't be as bad.
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 7:03PM
i think you have the mortgage interest deduction wrong.  you cannot deduct up to a million dollars of interest on a mortgage--you can only deduct the interest on up to a million dollar mortgage. same for the 2nd mortgage--the limit is not $100,000, but rather the interest on a loan up to $100,000.

to scrooge661, who suggests lowering the standard deduction so more people can itemize, that'll cost everyone more money. 

to biskitsmom, renters don't figure into it at all. landlords get to deduct the interest on all mortgages they hold to purchase or improve rental property. they're only talking about getting rid of the mortgage interest deduction for owner-occupied homes.

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 6:52PM

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 6:52PM
I do not give to charity any more. I can't aford to.
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 6:47PM
Renters DO benefit from it.  If landlords lose the tax break, rents will go up.
Nov 29, 2012 6:45PM
Over the long run eliminating the mortgage interest deduction will be very good for the housing market. It will reduce speculation and stabilize prices. If it has the consequence of lowering real estate prices in high price areas that should be seen as a good thing. IN the Bay Area the mortgage interest deduction is a subsidy to middle and upper income people. They don't need the subsidy, despite their whining to the contrary. 
Nov 29, 2012 6:42PM
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