Mortgage deduction going the way of the dodo?

[RetirementColdHardTruth]

I do not think this will pass but who really knows.

News Headlines

 

[Telly]

A couple months ago I remember reading a Scott Burns column in the newspaper that the effect on most people wouldn't be that bad, and why.

I found the article on his website:

Would You Miss the Mortgage Interest Deduction? - Registered Investment Advisor

 

[Brat]

They can start by eliminating the deduction for 2nd homes. Not only with the RE industry object but so will the small yacht and RV folks kick.

 

[M Paquette]

I think far fewer people benefit from the mortgage interest deduction than believe they do. My dad had always said that he wanted to have a mortgage for the tax deduction, and even got a new mortgage on their retirement place, when he could have payed cash. (There can be good reasons for doing this, but the tax deduction isn't really one of them. Pay all that interest so you can reduce your taxes by a fraction of it?)

When I wrapped up my parent's estate I dug up all the old tax returns, all professionally done by a CPA they liked. For every year, going back some 20 years, the standard deduction was a better deal than itemizing and taking the mortgage interest deduction, and so the CPA used the standard deduction. He never saved a penny from all that mortgage interest.

I'm pretty sure my dad never actually looked at the tax return numbers. He was happy believing that he got a break.

 

[jimnjana]

I think far fewer people benefit from the mortgage interest deduction than believe they do.

That's a fact. A fairer way to reward home ownership using the tax code would be to simply have a tax credit that would be phased out at some income level that would be based on the property tax value of the home or property.

 

[samclem]

A fairer way to reward home ownership using the tax code would be to simply have a tax credit that would be phased out at some income level that would be based on the property tax value of the home or property.

Fairer still: The government could get out of the business of "encouraging" home ownership. Their efforts to goose home prices with tax deductions, low interest rates, and unrealistically low down payment requirements helped build the bubble and crash for which we'll be paying a long time.

 

[Mulligan]

A couple months ago I remember reading a Scott Burns column in the newspaper that the effect on most people wouldn't be that bad, and why.

I found the article on his website:

Would You Miss the Mortgage Interest Deduction? - Registered Investment Advisor

While I wont disagree with the premise, it would hurt someone like me. Single, with a mortgage payment. Taking the standard for a single is about $5800 or so. By itemizing, Im near $12000 in total deductions. So it would tax me an extra $1500 or so. Down the road it wouldnt matter, as my interest amounts decrease. If i was married, it would be of little, help,too. Unless of course she demanded a bigger more expensive house to move into

 

[Gone4Good]

I'll go so far as to say the home mortgage deduction helps no one (or almost no one).

Everyone considering buying a house works out their monthly payment, and almost everyone incorporates the tax benefits into an estimate of what they can afford. If a tax break allows everyone to buy more house, nearly everyone will. As a result, housing prices should increase by roughly the present value of the interest rate deduction benefit. This won't be a dollar for dollar offset, but it significantly offsets any benefit to homeowners.

If you follow the dollars carefully, you'll find the beneficiary of the mortgage deduction isn't the borrower who gets the credit, but the mortgage lender. The home owner pays more for his house than he would without the deduction, and borrows more for the purchase. The tax savings of the borrow mostly flow to the lender in the form of higher interest payments.

It should be phased out completely.

 

[Independent]

I believe that eliminating the mortgage deduction was included in the Simpson/Bowles deficit reduction proposal. A poll on this board had something like 90% of the responders supporting that proposal.

Some might have preferred to salvage the mortgage interest deduction as a stand alone item, but were willing to give it up as part of a comprehensive tax reform package.

In minimally related news, the administration has released a study on Fannie and Freddie. It has three options, but they all point to less gov't involvement in housing. Treasury Report Calls for Winding Down Fannie, Freddie - Bloomberg

 

[meierlde]

Now for a radical propsal do like they used to do in the UK, add the imputed rent to the house to your income and treat the place like a rental for tax purposes (i.e. depreciate it, and full expense deductions including insurance). You would invent a statutory rent something like 1/240 of the value of the place per month or 1/20 per year. Then you take off the expenses for the house like a landlord would, including a 3.6 % depreciation deduction, taxes insurance and the like. Then add capital improvements to the house and depreciate them. Then when the house is sold you pay long term gains on the difference between the price and the depreciated value.
Its a wild proposal but essentially becomes completly neutral as to owning versus renting. (Note that the effective imputed rent would be about 1.5% after the depreciation)

 

[chinaco]

Whatever the approach.... there will be higher taxes for next 30 years!

 

[REWahoo]

Whatever the approach.... there will be higher taxes forever [-]next 30 years[/-]!

Fixed it for ya...

 

[GregLee]

The deduction never did me much good, since after the first 2 years of my mortgage, I could no longer find enough deductibles to get above the standard deduction. Comes of excessive frugality. On the policy question, I have a libertarian slant: let the government get out of the business of encouraging home ownership, horses, children, or anything whatever. It's no proper business of government. Eliminate all deductions.

 

[missionfinder]

The deduction never did me much good, since after the first 2 years of my mortgage, I could no longer find enough deductibles to get above the standard deduction. Comes of excessive frugality. On the policy question, I have a libertarian slant: let the government get out of the business of encouraging home ownership, horses, children, or anything whatever. It's no proper business of government. Eliminate all deductions.

I go even farther and say eliminate the income tax, and replace it with the Fair Tax.

 

[Mulligan]

The deduction never did me much good, since after the first 2 years of my mortgage, I could no longer find enough deductibles to get above the standard deduction. Comes of excessive frugality. On the policy question, I have a libertarian slant: let the government get out of the business of encouraging home ownership, horses, children, or anything whatever. It's no proper business of government. Eliminate all deductions.

+1 to the above. Especially the children. It seems like the government wants people who cant afford children, to have more of them! Its gotten to the point that you need to be very rich or very poor to have children. Just my opinion.

 

[photoguy]

I'll go so far as to say the home mortgage deduction helps no one (or almost no one).

Everyone considering buying a house works out their monthly payment, and almost everyone incorporates the tax benefits into an estimate of what they can afford. If a tax break allows everyone to buy more house, nearly everyone will. As a result, housing prices should increase by roughly the present value of the interest rate deduction benefit. This won't be a dollar for dollar offset, but it significantly offsets any benefit to homeowners.

I agree with your reasoning that people buying now gain no real benefit from the mortgage deduction since prices are raised in response. However, to remove it now would certainly hurt those who already own a home.

 

[haha]

I agree with your reasoning that people buying now gain no real benefit from the mortgage deduction since prices are raised in response. However, to remove it now would certainly hurt those who already own a home.

Not to mention the enormous US property transaction market. I believe that these people are strong enough to fend off any important changes to the mortgage deduction for a very long while.

Ha

 

[FIRE'd@51]

Everyone considering buying a house works out their monthly payment, and almost everyone incorporates the tax benefits into an estimate of what they can afford. If a tax break allows everyone to buy more house, nearly everyone will. As a result, housing prices should increase by roughly the present value of the interest rate deduction benefit. This won't be a dollar for dollar offset, but it significantly offsets any benefit to homeowners.

While I think this analysis is probably correct, I can't believe the government would do anything to further depress real estate prices at this time. If anything, they want housing prices to increase.

 

[East Texas]

I go even farther and say eliminate the income tax, and replace it with the Fair Tax.

Yep.

I haven't have a mortgage in years and couldn't get on a Schedule A for years before that and I did just fine. The reason I did just fine was because I bought a house I could afford without depending on the government's tax whims.

 

[scrabbler1]

+1 to the above. Especially the children. It seems like the government wants people who cant afford children, to have more of them! Its gotten to the point that you need to be very rich or very poor to have children. Just my opinion.

+1 to this. Throughout the tax code there is a huge subsidy to those with children from those without children. And all it is is a lifestyle choice.

 

[jimnjana]

Fairer still: The government could get out of the business of "encouraging" home ownership. Their efforts to goose home prices with tax deductions, low interest rates, and unrealistically low down payment requirements helped build the bubble and crash for which we'll be paying a long time.

I agree. I'm just resigned to the fact that as long as there are politicians, the tax code will be used to their benefit. I believe the root of the tax break is that they (politicians) realize that home owners spend money. This helps the economy move along. (This thinking also led to the mortgage crisis and housing bubble, when it became a right to be a home owner) Thus give the home owner a tax break as a reward for spending money...

 

[seabourne]

I'd recommend phasing it out over 10 years by lowering the applicable mortgage limit 10% per year. It allows people who have signed contracts for mortgages the bulk of the benefit, encourages savings by repayment, and acts to reduce the new mortgages without crashing the market. Problem with that proposal is it give opponents 10 years to try to kill it.

 

[youbet]

I agree. I'm just resigned to the fact that as long as there are politicians, the tax code will be used to their benefit.

There ya go. If politicians can enact some legislation that benefits folks they want to vote for them, even if the legislation is short-sighted in the so-called benefits it provides, they'll do it every time. Mortgage interest deductions benefitted mortgage lenders, real estate agents, etc who provide lotsa political donations and home owners thought the legislation was the best thing since sliced bread.

Actually, the legislation is bad for the economy in the long run, as most attempts by the gov't to buy votes turn out.

 

[Gone4Good]

I agree with your reasoning that people buying now gain no real benefit from the mortgage deduction since prices are raised in response. However, to remove it now would certainly hurt those who already own a home.

Like any major change, it would have to be phased out slowly to minimize the impact . . . say 5% per year over 20 years would be pretty painless.

Having said that, we as a nation have zero tolerance for anything uncomfortable. So I expect all kinds of kicking, screaming, and foot stamping over any proposal that would actually save money, no matter how worthwhile on the merits.