One of the reasons there is talk about getting rid of the mortgage interest deduction is

[WCGreen]

because of four years of mortgage interest schedules, through purchase and refinancing, into rates of 5.5% or less.

At that point, most of the people are not paying enough interest to get over the taxable income levels established by the standard deductions, especially for those who have been paying down on their mortgage for ten or more years.

I know many people are still going to benefit from that program so the best way to remove gently the effect of the mortgage interest deduction is to phase it in over the next five years or so.

This will also keep pressure on the mortgage lenders to keep rates low because of the perception that you can write off almost all of your initial payments, which are mostly interest at the beginning of your mortgage commitment, to help you afford a home.

I am not saying I agree or disagree but I am bringing this all up as someone who has prepared thousands of tax returns over the 25 years. As a matter of fact, with more people not needing to itemize, that just makes it easier for people to prepare their own taxes and not rely on a paid preparer.

This information, I think, is critical when measuring the effect of a large change in the tax structure our government has constructed over the last 50 or 60 years.

[Bluenorthwest]

1. 23.6 decades since independence from Britain.

nt

[WCGreen]

3. Thanks, I originally was going to say years and then I forgot when I went over

the post...

[kestrel91316]

2. I don't have a dog in this fight, being too poor to ever qualify for a mortgage.

If it helps the budget, sounds good. Might help keep home prices reasonable over time, too.

[CaliforniaPeggy]

4. Thank you for this good info...

[cthulu2016]

5. The problem is more valuation than cash flow

eliminating the deduction decreases the value of all property, including property that has no mortgage.

The deduction represents future value that is intrinsic to all property.

And since interest rates rise and fall, the current low-rates do not negate that intrinsic value.

If you buy a house today at 4% you will still be likelier to be able to sell it down the road even if rates are 20% (like in 1980) because the intrinsic federal subsidy of the value expands along with the size of the interest component of a loan. So the market value of that property will increase more, in an inflationary period, than a comparably priced diamond or other physical investment.

Personally, I think if someone wants to cut taxes to help the economy I would return to all interest being deductible. I am not comfortable with the special status of property, but anything that can be done to reduce effective borrowing costs would be non-point as stimulus.

[lonestarnot]

8. Ru Rogh. I hope OP paid attention.

I liked reading your post. Thanks for the insight.

[cthulu2016]

9. I am sure wcgreen knows more about practical tax issues than I do

I am just noting my main concern about the HMID, but my observation doesn't challenge the OP's observations about the practical cash value to the homeowner today.

[WCGreen]

17. Of course it is based on cash flow...

The higher the interest rate the lower the value of the house.

People purchase homes based on how much they can afford per month. Realtors know this.

[cthulu2016]

35. I think we may be talking past each other

I am not questioning what you are saying in practical household terms. My objection is strictly macroeconomic. We need not disagree because I don't think we are talking about the same thing.

When I read you OP my thought was, I agree with this on its own terms, that the HMID is less significant to individuals today for a variety of reasons.

And if you are saying that that current reduced effect is offering a political window for the RW to talk about the deduction (I think you are), I agree with that also.


I am just saying that the loss of the HIMD any time this decade would be a macroeconomic disaster.


If someone buys as much house as they can get for $1000/month then the quality of that house will change a lot based on interest rates, but the amount of their deduction during the first few years of their mortgage will not be as variable because either way it's going to be 90% interest to start off with.

(The significance of the first few years of a mortgage is that everyone has the first year, less people the second, less the third and so on. The first year is the commonest year. Also, as the deduction decreases over time, inflation should be mostly making up for the higher real payments as more principal is addressed, so if the mortgage payment is fixed the relative cash flow value of the mortgage-minus-HMID will be reasonably flat if the bank did a good job of predicting inflation when they wrote the mortgage.)

Anyway... the point is that inherent value of the property to a new buyer is an intrinsic component of the value of the property, as long as the HIMD exists. And anyone who buys the property will be a new buyer, and will be deducting 90% of their mortgage for years.

So if we eliminate the HIMD, as a thought experiment, the first effect that comes to mind is cash flow. Homeowners would face a tax increase of some size, small or large depending on their circumstances.

But to me, the more dangerous problem is that every home in America would have a lower value, immediately. And that would be a decline in property as a class.

Anything asset that could have previously qualified for the HIMD would be less valuable to a potential purchaser. (Including properties with no current mortgage at all.)

So that even if the loss of cash (tax increase from loss of HIMD) on one end was made up for by an equivalent tax break on the other end—that John and Jane Q Public save exactly the same amount on their income taxes from a rate reduction as they previously saved from the HIMD and lose no annual net cash—the loss of the HIMD has still made their house less valuable because a renter gets the same tax rate reduction as a homeowner gets.

The renter does not gain that benefit by buying.

And because of the peculiarities of the current economy arising from a collapsed housing bubble we face a protracted path to recovery because residential construction cannot lead us out of it. (Residential construction usually leads us out of typical business cycle recessions because real estate is rate sensitive and responds first to monetary stimulus.)

So anything that makes property, and property in particular, intrinsically less valuable across the board would be particularly harmful in our current balance-sheet mini-depression circumstance.

Put another way, if I had to take one trillion dollars out of the US economy in 2013 somehow, reducing home prices realized by one trillion dollars would be a particularly bad way to do it. Not quite as bad as subtracting one trillion in wages, but very bad nonetheless.

[WCGreen]

21. The value of the house is based on the cost of interest.

Because people look for houses, or should look for a home, based on how much they can afford to pay each month. The higher the rate the lower the value of the house and then with a lower rate, the home's valuation increases.

Now this is only in the open market place and not when your tax assessment is made to pay property taxes.

[ohheckyeah]

6. I know a lot of people,

including myself, who might not be able to afford their houses if the mortgage interest deduction is taken away.

When people buy a home it is with the knowledge that interest can be deducted. I'm getting sick of them changing the damn rules mid-stream all the damn time.

[cthulu2016]

7. It kept a roof over my head for the whole Bush administration

My income was so low, and my mortgage so expensive (relative to my income) that I seldom owed anything other than self-employment tax. I could not possiby have afforded to rent a comparale property at the time.

I no longer own, so I don't know what may have changed the last year or three

[Igel]

14. It's the problem with uncertainty.

You make present decisions based upon a prediction of what's likely. The more likely the prediction, the easier the decision.

As soon as you start changing things mid-stream it has the look and feel of being a retroactive change. It's certainly a change to the preconditions for your decision.

If a prediction seems assured and fails to happen, we feel cheated.

If it's hard to make a prediction, we might make a guess and decide based on the guess or we simple dither.

Right now I don't know:
if I'll have a job a year from now (because of state budget cuts)
what federal taxes will be--will i get $3k back or pay $2k?
what health insurance will be like (it changed mid-year last year because of the ACA)
what tax deductions will be
whether my house will be worth $10k less, $20k more, or the same
etc.

It makes for a lot of uncertainty. My best course of action is to pay down debt and then save what I can, hoping that inflation doesn't take off. That, repeated by 100 million other households, is a recipe for short-term economic stagnation.

[cloudbase]

10. It won't happen.

It's political suicide for anybody voting to do away with the deduction.

[xchrom]

11. Tax the shit out of the rich 1st. Close corporate loop holes.

Aggressively go after taxes from off shore accounts, etc.

Then and only then - if more revenues are needed we'll talk about those deductions.

Why give the store away?

[warrior1]

12. amen

[brush]

13. Wait a minute

Wait a minute. This is not clear. It sounds like WCGreeen, a tax preparer, is recommending, despite saying he doesn't agree or disagree, that we get rid of the mortgage deduction thus making tax prep so simple no one needs to hire him to do their taxes. He's recommending putting himself out of business? I'm not buying that. It sounds too Romneyish (one of the loopholes him and Ryan are proposing to close to pay for their 5 trillion tax cut for the rich). Nope, not buying it. If middle class homeowners lose that deduction they won't be middle class for long. But I guess that's the point as far as Romney, Ryan and the repugs are concerned. Try that ploy somewhere else, WCGreen.

[WCGreen]

16. You got me...

I am a secret republican who has laid in wait for ten years just so I could, after predicting the future, disguise my deep right wing approach to everything except, of course the tax deduction for home mortgage interest....

Get serious, will you....

[brush]

22. I am serious

What are you saying with this post? It's not clear. You're a tax preparer but you recommending something that will cut your business? I don't get it. Getting rid of the mortgage deduction is not a good idea.

[WCGreen]

23. I'm presenting facts as to why the Republicans are putting this out as a possible

deduction to get rid of when they talk about streamlining the tax code.

I brought up that I am a tax preparer and getting rid of the deduction could hurt my practice, small as it is, in order to show that I have a stake in the discussion. I would rather see that we keep the deduction because it does help people get into homes as well as keeping the valuation of homes at a level so that people and local governments can leverage that valuation into money for other wealth producing activity.

[BlueToTheBone]

24. thanks

I admit, I was a little confused with your first post. I need that deduction in order to be able to be a homeowner.

[brush]

40. Thanks also

Glad you cleared that up.

[SheilaT]

15. I have never understood people who

somehow desperately need the interest rate deduction to make a house payment. When I went to buy this place three years ago, I wanted a payment that was no more than the rent I'd been paying. In the end I wound up with a payment less than my previous rent.

My tax preparer told me after I bought this place that I'd be able to deduct the interest payment for about the first five years, and after that, it wouldn't be enough to let me itemize. Meanwhile, I have a house payment I can afford.

I wonder just how many tax payers are actually using the interest rate deduction? And I remember reading something back in the 1970's suggesting that it be phased out, that it had already outlived its usefulness, and in fact was a huge factor in the inflation of housing prices.

[WCGreen]

19. It does two things, it puts more money into the economy because of increasing

the valuation of individuals largest asset and that leads to being able to leverage that money into public investments.

[SheilaT]

36. Not sure I entirely follow you here.

In my case, I'm spending just about exactly (a little less) in mortgage as I was in rent. My absolutely number one priority every time we bought a house when I was married, was that we could afford the payment without caring about a tax deduction. I'm not sure a larger house payment puts more money into public investments. Larger house payments certainly enriched a lot of bankers.

And the housing bubble we had recently was the very bad side of the idea that people should take out very large mortgages because housing prices would invariably go up.

[WCGreen]

39. Investors in real estate development like to see stability and stability in

a community is one that has a large percentage of people invested into the community by purchasing homes.

People who own their property are more likely to want schools, shopping, churches, parks and are willing to pay for these amenities because they help create an environment of stability which increases the long term viability of the area.

[SheilaT]

42. And there would probably be a lot more stability if

people actually had a lot more equity in their homes: owned them outright, actually put 20% down, had a real mortgage that also paid down principal rather than just an interest only one, and so on.

It's having essentially no investment in a home that makes it relatively easy for people to walk away from the loan, and that oh-so-precious interest deduction. And has already been pointed out, there is considerably less than a dollar for dollar deduction. I wonder just how many people run the exact numbers before signing the mortgage paperwork and figure out exactly what they will be getting back at the end of the year.

[WCGreen]

43. But the lower the interest rates available now means more people are paying more

principle and getting closer to outright ownership.

Even though this is anecdotal, I know a lot of my clients are paying extra after refinance and are building a lot of equity to save for retirement.

[Liberal_in_LA]

32. as a person without kids, mortgage deduction allowed me to itemize

for the first time. It was wonderful. and i"m a relatively new homeowner, paying lots of interest in my mortgage payment. KEEP THE DEDUCTION.

[mnhtnbb]

18. I've been doing our own taxes for 6 or 7 years with TurboTax. The interest rate deduction

for our home mortgage--at least on our returns--is not dollar for dollar.
It ends up being about equal to whatever %tax rate you are paying.

Example: $100. in interest does not equal $100. deduction.
If our tax rate is 15%--we get to deduct $15. for every $100. paid in interest.

[WCGreen]

20. Of course it is always tied to your tax rate...

But look at it this way, money returned through the interest on mortgage is much better than you can get on any othere investment.

So if you had a $100k to invest now, you would get about $1500 back in the form of interest. I accounted the for the state and federal taxes you would be paying.

But if you borrowed that $100k to purchase a home, you would be getting about $300 to $500 back on your borrowed investment on your home which is also an asset that you can leverage because it is normally an appreciating asset.

I'm sorry I didn't make that clear. I thought most people would see that they aren't getting a dollar for dollar take back in taxes.

[NashvilleLefty]

25. It's always cheaper for me to use the EZ form instead of itemizing. nt

[DJ13]

26. Were going in the wrong direction

We should be allowing all interest paid on a mortgage to be deducted on a simple single line in the basic 1040 EZ form instead of trying to eliminate it entirely.

[unblock]

27. if this is gonna happen, at least you have to grandfather existing mortgages.

not cool at all for people to lock into a 30-year mortgage assuming 30 years of tax deductions and then, a few years in, face maybe 27 years of losing the single biggest tax deduction they could ever hope of seeing.

phasing it in over 5 years may be a good idea for NEW mortgages, but even a 5-year phase in for existing mortgages is a guaranteed way to increase foreclosures. some people couldn't afford their house AND they would be forced to sell at a much lower price due to the tax change.

[RainbowOverTexas]

29. if you...

cant afford your house w/o the tax deduction then you shouldn't have bought it. That is the problem these days is people never plan ahead they just assume things will be the same forever part of the reason for the housing collapse is people took loans where the only paid on the interest and never of the principal.

[RegieRocker]

34. Black cloud over texas

It's not about whether they can afford home or not, it's people can't afford to lose deduction. It's about why should they? Why is it always the little guy getting the shaft? For most folks we are talking upwards of 3k extra in taxes per year. That's ok with you right?

[SheilaT]

37. I'm with you, Rainbow.

I have never been able to understand the justification of a sky-high mortgage for the interest deduction. First off, it's not as large as most people think it will be, and second, over time it goes away.

And I really, really never understood interest only loans.

[unblock]

38. well then why bother with mortgages at all? just pay cash. after all, you could lose your job.

this is truly facile. virtually ALL lending assumes that the future has something to do with the past.

business lending presumes the company will continue to produce revenue in some relation to what it has in the past, personal lending presumes you have the ability to pay (meaning income) in some relation to what you have had in the past, etc.


note that we're also not talking about all other things being equal. it's not like losing a tax break is the ONLY bad news that any homeowner has had these days. we're talking about taking away their biggest deduction IN ADDITION TO slashing the value of a house that's ALREADY been slashed in value IN ADDITION to probably no raise if they're lucky to still have a job IN ADDITION to perhaps a hike in their property tax as municipalities have been getting squeezed.

the bottom line is that many, many homeowners, including many who put a responsible 20% down are now underwater on their mortgage, and may be in trouble due to many factors. taking away their biggest deduction, one that's been a vitual institution for decades, at this time, is really piling it on.

[SOS]

41. Deducting interest payments from taxes began in 1913

How do you "plan ahead" for the elimination of something that started 99 years ago?

It's also difficult to plan ahead for a massive tax increase under a Republican
administration since they are always promising to never increase taxes.

The only way to effectively plan for this is to understand that the middle class
would be shafted under Romney.

[RegieRocker]

28. Seriously what is this crap?

Hammer the 1% and Corporations. They have so many freakin loopholes I am pissed when someone brings this crapola up.
Make the tax on all income monies (investments, dividends blah blah blah) the same for their tax bracket. Make them pay 36% on all freakin income no matter where it comes from. Raise the tax for the 1%. They don't like it they can leave. Go to another country. I would be glad to see them all go. It's always about stiffing the little guy. Damn!

[WCGreen]

30. You know, it does give millions of people a stake in stability.

Owning a home makes people care about their community, their neighborhood, their country.

This is what Romney and the republicans want to do. Get rid of that tax deduction so that the people at the top don't have to pay tax.

[RegieRocker]

33. That makes no sense

If they did'nt have the mid they would have to pay more taxes. Grr....

[PowerToThePeople]

31. A couple of things

(I am not a property owner - Renter, so not currently directly effected by this)

But, It would seem as though Repugs would dislike this because of double taxation. Bank pays on profits, home owner pays on mortgage. Is this not what they whine about?

Let me get a loan with the FED, I want the best interest available. Why should I be forced to pay bank rates?