What should happen to the mortgage interest deduction?by Tim Manni
It has been a while since we last heard any rumblings regarding the mortgage interest deduction. Yet, on Tuesday, CNBC Senior Editor Mark Koba wrote a piece which reminded us that the mortgage interest deduction could be changing this year.
The deduction should go
The reasoning behind trimming or eliminating the deduction—which has been in place since 1913—comes down to simple economics, according to some.
The mortgage interest deduction costs the U.S. at least $70 billion a year, wrote Will Fischer and Chye-Ching Huang, co-authors of a recent report titled, “Mortgage Interest Deduction Is Ripe for Reform.”
“The mortgage interest deduction is one of the largest federal tax expenditures, but it appears to do little to achieve the goal of expanding homeownership,” wrote Fischer and Huang. “The main reason is that the bulk of its benefits go to higher income households who generally could afford a home without assistance: in 2012, 77 percent of the benefits went to homeowners with incomes above $100,000.”
Proposal after proposal
There have been several proposed changes to the tax deduction—from limiting the deduction for higher-income households, to phasing out the deduction over time, to changing it from a deduction to a tax credit—but still no official change from lawmakers.
Tax-reform hearings are scheduled throughout the remaining summer months and the upcoming fall season, but will any of these scheduled hearings bring about change?
While we wait and see, let’s look back and show you HSH.com’s opinion on what should be done with mortgage interest deduction.
The deduction should change
Towards the end of 2012, HSH.com published an article titled, “Real estate’s fiscal cliff: 5 items to watch out for.” The first item on the list was the mortgage interest deduction.
Here’s what we said:
Not that anyone purchases a home solely to claim the deduction, but the tax break certainly makes homeownership more attractive, affordable, and according to some, a stabilizing factor for housing markets.
But the long-considered cornerstone of American homeownership is in jeopardy as the government still hasn’t voted to extend the tax break. A mounting national deficit is the main reason the deduction could be allowed to expire. Presently, interest on loans of up to $1,000,000 can be deducted, including primary and secondary homes.
“I believe the deduction won’t be eliminated, but scaled back to coincide with the current conforming loan limits for high-cost areas,” says Keith Gumbinger, vice president of HSH.com. “So rather than a million dollar maximum limit, the total might be scaled back to $625,500, for example. Interest accrued on mortgage debt in excess of that figure would no longer be deductible.”
Readers: What do you think should be done with the mortgage interest deduction?