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August 13th, 2011

The mortgage interest deduction is back on the chopping block

by Peter Miller


chopping blockThe mortgage interest deduction is back in the news.

The super committee

Following the downgrade of the U.S. debt, a new bi-partisan “super-committee,” set up under the deficit deal, is supposed to look at ways to get government finances in the black–without raising taxes.

In my eyes, it’s difficult to see how they will be able to resist tinkering with the mortgage interest deduction, assuming they do anything at all.

One possible approach would be to lower the maximum amount of mortgage debt from which interest can be deducted, from $1 million to something less.

Is the mortgage interest deduction worth keeping?

According to Rep. Gary Miller, (R-Calif.), 37 million taxpayers save $72 billion annually as a result of the mortgage deduction.

According to the Realtors’ chief economist Lawrence Yun, it’s certainly worth keeping:

“The MID facilitates home ownership by reducing the carrying costs of owning a home, and it makes a real difference to hard-working middle-class families.”

It used to be that you could write off all your mortgage interest–mortgage rates, the value of the property or how much you earned didn’t matter.

Complex rules: Not all mortgage interest is deductible

Now, the rules are more complex and not all mortgage interest is deductible.

According to the IRS:

The rules for deducting home mortgage interest for 2009 were: (1) if a taxpayer took out a mortgage before October 13, 1987, secured by the taxpayer’s main or second home, all the interest was deductible, (2) if the taxpayer’s mortgage was after October 13, 1987, and the funds were used to buy, build, or improve that home, all interest could be deducted if the total of all mortgages on the property was $1 million or less ($500,000 if married filing separately), and (3) taxpayers could deduct all of the interest on an additional $100,000 ($50,000 if married filing separately) of mortgages on their main or second home other than to buy, build, or improve that home.

Should the deduction scheme be changed again?

One suggested proposal would limit the write offs available to wealthier households.

According to the Wall Street Journal:

The changes would be phased in gradually over the next few years. For the 2009 tax year, the 33% tax bracket starts with couples with taxable earnings of $208,850, when adjusted for personal exemptions and various deductible expenses. A taxpayer in the top bracket paying $1,000 of mortgage interest, for example, would see a tax break worth $350 reduced to $280.

The impact of a total wipe-out could be substantial

Another idea, very simply, is to eliminate the mortgage interest deduction altogether. This may not raise mortgage rates but it would raise mortgage costs.

First: The government would gain better than $720 billion during the next decade (using Rep. Miller’s figures).

Second: That gain would likely be off-set by losses in the housing sector.

According to the NAR:

“One thing that is indisputable is that eliminating the MID will lower the homeownership rate in the U.S.,” [Yun] said. “While we must ensure that the conditions that led to the artificially inflated home ownership rate of the bubble years do not resurface, we also need to create the conditions for sustainable home ownership, which has been shown to provide myriad social benefits for families and communities.” 

In the end, I expect little change.

The housing market is too fragile to fiddle with a tax deduction which distinguishes owning from renting.

One Response to “The mortgage interest deduction is back on the chopping block”

  1. Mortgage Interest Deduction… Good or Bad? | Garage with a Detached Home | Gwinnett County GA Says: August 15th, 2011 at 9:16 am

    […] The mortgage interest deduction is back on the chopping block (hsh.com) […]

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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