mortgage interest

Mortgage Interest Deduction: Crunch Time

Federal budget negotiations are moving into a critical period as the government will run out of money by August 2nd unless something is done to stop it. In the last week, President Obama has stepped forward and met with both Democratic and Republican leaders in the US Senate and House of Representatives in an effort to find common ground. There is a lot of huffing and puffing from Democratic as well as Republican leaders. A number of them will have to back down from lines they’ve drawn in the sand if a compromise is to be reached.

The alternatives to avoid exceeding the debt limit include some combination of cuts in federal spending, tax increases to generate new revenue, and increasing the debt limit itself. There is general agreement that the amount needed to close the gap is around $4 trillion. Both parties agree on the need for spending cuts, but Republicans want to cut much deeper than Democrats are willing to go, focusing on far deeper spending cuts in social programs such as Medicare. Conversely, most Republicans are adamantly opposed to any tax increases, while most Democrats would support some business tax increases and personal income tax increases for taxpayers earning over $250,000 annually.

In the mix of possible budget cuts and tax increases are possible changes to the mortgage interest deduction. It is one of the possible alternatives recommended by the National Commission on Fiscal Responsibility and Reform (AKA the President’s bipartisan deficit commission). Their proposal is to reduce the cap on the mortgage interest deduction from the current $1 million level to $500,000, and replace the deduction with a 12% mortgage interest tax credit available to all taxpayers. The latter would create, for the first time, an incentive for home ownership for many moderate income taxpayers. Today many families with incomes below $45,000 who buy homes with mortgages of $140,000 or less get no federal tax benefit from the mortgage interest deduction.

In terms of tax liability they are just as well off – or better off – with the standard deduction. The President’s bipartisan deficit commission estimated that this change would produce a huge amount of new tax revenue, as the proceeds from reducing the cap would far exceed the revenue losses from moderate income home buyers who take advantage of the new 12% mortgage interest tax credit.

The American Homeowners Grassroots Alliance believes the commission’s revenue estimates are likely wrong. The new 12% mortgage interest tax credit is likely to create an explosion of new moderate income buyers who snap up the current huge surplus of inexpensive distressed homes on the market. Everyone who takes advantage of the tax credit will eat into the new revenues generated by reducing the cap on the mortgage interest deductions to $500,000.

The number of consumers who earn less than $45,000 annually is immensely larger than the number of homeowners who earn enough to support a mortgage in the $500,000 – $1,000,000 range. The net result is that the proposal is more likely to reduce federal tax revenues because so many more consumers will have a tax incentive for home ownership. In our minds, this simultaneous increase and redistribution of tax benefits would be good policy however. It would create an incentive for home ownership for moderate income home buyers for the first time, and would revitalize the housing market.

We’d love to hear your thoughts and comments about what the government is considering with the mortgage interest deductions. Do you believe it should change, or stay as it is? Use the comment link below to sound off.

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Home and Commercial Inspections in the Columbia SC area is our specialty! Every year we help hundreds of clients save tens of thousands of dollars, by responsibly finding and exposing conditions that threaten property, value and safety. To learn how we may be able to serve you, please click and read, or call 803-261-5810.

The Mortgage Deduction: Sacred or Superfluous?

As our country faces possibly the biggest budget crisis ever, the Obama Administration has created a deficit commission charged with discovering the best ways to bring down the national debt. It has come up with a plan to cut our $3 trillion dollars in debt over the next decade. One of the proposals this commission has suggested is to eliminate the time-honored mortgage interest tax deduction. While this idea has garnered some bi-partisan support, it has also created a major uproar among the mortgage industry associations, who claim now is not the time to mess with the tax break. So who is right?

Opponents of this proposal say it is essential to creating affordability in the housing market.

“It would immediately stop in its tracks any stabilization we are seeing in the housing market and would effectively increase the cost of homeownership for millions upon millions of people,” according to Michael Berman, chairman of the Mortgage Bankers Association.

That thought was echoed by Ron Phipps, president of the National Association of Realtors. “Any changes to the deduction, now or in the future, could critically erode home prices and the value of homes by as much as 15%,” adding, “it will effectively close the door on the American dream.”

In fact, the NAR recently surveyed homeowners and found that almost 75 percent of them consider the deduction “extremely” or “very important.” This suggests that perhaps some may not have bought homes without the tax break.

The current mortgage interest deduction allows homeowners to deduct all of the interest paid on their homes each year from their tax returns. Some interest from mortgages on investment property and home equity loans is currently eligible for the tax deduction. Proponents say that mortgage deduction really only profits the wealthy as lower-income buyers are not likely to itemize their taxes and cannot take advantage of the savings. They say it does not truly encourage homeownership, but simply encourages the wealthy to buy bigger homes than they otherwise would. Furthermore, the Treasury has estimated this mortgage deduction, one of the largest deductions in the U.S. tax code, will cost the government $131 billion in revenue in 2012.

The White House commission has proposed that instead of deducting mortgage interest, homeowners would be given a 12 percent non-refundable tax credit on mortgages up to $500,000. This would make the tax advantage available to all buyers, not just those rich enough to itemize their tax returns. There would also be no credit or deduction for second houses or home equity loans.

The issue comes down to answering the question ‘Is the mortgage deduction necessary to the full functioning of the housing market?’ In all honesty, no. People bought homes before the introduction of this tax break and they could certainly do so without it. The follow-up question is ‘can the economy and the housing market survive the immediate elimination of the mortgage deduction?’ That is much harder to answer.

We’d love to know how you feel. Tell us your thoughts by clicking the comment link below. Your email address will never be shared with any third party, and will not be published with your comments.

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Home and Commercial Inspections in the Columbia SC area is our specialty! Every year we help hundreds of clients save tens of thousands of dollars, by responsibly finding and exposing conditions that threaten property, value and safety. To learn how we may be able to serve you, please click and read, or call 803-261-5810.