Mortgage Interest Deduction: Not A Tax Break For The Middle Class

[abelenkpe]

Mortgage Interest Deduction: Not A Tax Break For The Middle Class

http://www.huffingtonpost.com/ben-hallman/mortgage-interest-deduction_b_2213304.html?utm_hp_ref=business

As Washington searches for ways to drum up tax revenues in a bid to avert the fiscal cliff, the interest deduction some homeowners claim on their mortgages may be on the chopping block.

The possibility that this deduction might go away has prompted the sort of dire warnings that might be reserved for news that the American flag will lose its stars and stripes: The housing market, finally recovering from a long decline, will plunge anew as values fall. People won't buy as many homes. Middle-class families will suffer and despair.

But this view, voiced with the most conviction by lobbyists for home builders and real estate agents, simply isn't grounded in reality. The deduction helps some middle-class families to a modest degree, but it is mostly a giant giveaway to the wealthy. Moreover, there's no evidence to suggest home prices would crash or people would suddenly choose renting over buying if it went away.

"It's time to take a closer look," said John Taylor, the president of the National Community Reinvestment Coalition, which advocates for low-income borrowers. "This is far and away the government's largest housing subsidy, and it primarily benefits people who are financially comfortable and some people who are extremely financially comfortable."

(snip)

Most likely, the mortgage deduction will stay, in some form. The deficit reduction commission led by former Sen. Alan Simpson and former White House Chief of Staff Erskine Bowles proposed reducing the limit on the deduction to $500,000 of a home's value, down from $1 million, and eliminating the tax break for a second home -- options that seem likely to attract broad support.

The Obama administration has also proposed a cap on deductions at 28 percent for high-income households. This could force homeowners to choose between claiming a mortgage debt or some other kind of deduction. In either scenario, middle-class homeowners would retain their tax credit.

(more at link)


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I do not own a home so I'm interested in what others here think of this? I do know that even a modest two bedroom one bath in Culver City and much of los angeles goes for anywhere from 650,000 to 1.2 million so I think it would effect middle class families and the housing market. At least here.

What say you DU?

[NYC_SKP]

1. I tend to agree. If it was a flat deduction, it would be more fair to middle class owners.

But when you think of how many cannot and will never be able to afford a home, it seems reasonable to eliminate it or at least find ways to limit it's extraordinary benefit to the very wealthy.

[gollygee]

2. Do owners of apartment buildings get the deduction for their mortgages?

Because if they do and it's taken away, people's rent will go up.

I don't know the answer. This issue doesn't affect me as my mortgage is paid off. But I do think it will hurt a lot of homeowners. Most have a mortgage or (I think but the question above would answer for sure) pay rent to someone with a mortgage, and that expense would end up in their rent.

[abelenkpe]

9. Depends on the owner doesn't it?

Place I live in has been paid off since the fifties. Whole neighborhood was built during the depression with many homes owned outright and passed down through families. But for owners with mortgages? Maybe.

[gollygee]

18. This stuff always seems to end up being more complicated

than it seems on the surface.

[Travis_0004]

10. No.

The deduction is only for ones primary home, or secondary home.

If you rent out your home, you can not claim the deduction, except in situations where you have a roommate and share common facilities.

[gollygee]

15. Thank you!

That helps me understand this better.

[kelly1mm]

17. While technically true, this answer is missleading. While apartment (or any rental property)

interest is not a Schedule A Mortgage interest deduction, it is a Schedule E rental property expense and is a deduction from rental income.

[ArcticFox]

32. Finally a correct answer

[kelly1mm]

40. Years and years of experience. You would be suprised what people think they know about taxes.nt

[ohheckyeah]

3. I think it stinks....

people buy houses and figure in the value of that deduction. I can't afford to lose the deduction.

[mike_c]

4. I'm happy to see it go....

I think its primary purpose is to encourage property sales/buying, which enriches the banks, mortgage industry, and the real estate industry. It encourages people to take on debt that-- in recent times at least-- has been crippling.

Fair disclosure: I'm a lifelong renter by choice. But the flip side of that is that no one has ever given me a tax break on the rent I pay but I've gotten along just fine without one. House buyers can too.

[Incitatus]

5. I agree with limiting it to 1 home and having a cap.

$500K seems reasonable. I don't think many middle class people live in million dollar homes. Maybe they could let those already receiving those deductions continue and limit it to $500K for new home buyers.

edit - I am a new home owner receiving the deduction. I could get by without it, but I would rather not. It does give me more discretionary income that I use at local businesses for products and services. That helps the economy, working class people with extra spending money. The wealthy just take their tax savings and dump it into stocks.

[abelenkpe]

8. It depends on the area

Like I said above a two bedroom one bath in los angeles can go anywhere from 650,000 to 1.2 million. You think a rich person lives in one of these homes? Could find a home for less but it'd be a long commute into the city or a neighborhood not known for safety or adequate schools. I know many middle class families with homes over 500,000. Part of that is due to the housing bubble, which was crazy here and seems to be renewed lately. I'm sure there are other areas that are similar.

[Incitatus]

11. They will probably spend their deduction in the local economy too.

That is a strange article for what I thought was a left-leaning site. It certainly is a tax break that benefits middle class taxpayers. That writer is pushing tax plans from Paul Ryan.

[abelenkpe]

14. Yeah I thought it was pretty odd too.

That site hasn't been the same since being sold.

[madinmaryland]

12. How much do you have to make to afford a $750K home?

Wouldn't you need a salary of $250K+ to afford a home that price?

[abelenkpe]

13. You'd think that wouldn't you?

But I know many people, neighbors, co-workers who bought homes around 600,000 on salaries of 70,000 - 90,000 a year. Bubble mania was great here in southern California.

Still know people who got FHA loans for homes that cost around 650,000 with small downpayments. they have steady jobs and service their loans but they are house poor.

[libdem4life]

19. No, you move up from a $500,000 home and apply your unearned equity.

It's what keeps the real estate bubble alive. First time buyers need not apply at this level unless they had hefty wedding checks.

[abelenkpe]

26. gotta admit everyone I know who bought a home

over the past ten years....every single one...had help from a parent or inheritance that allowed them to get a mortgage. I don't know anyone who saved up a proper down payment.

[libdem4life]

31. In the So Cal real estate business for years. Many deals were 3 and 4 legged...called "contingent"

and you could literally see the equity moving up the ladder. It was dizzying. Or devastating if one "leg" fell out. And mortgage interest deduction was a primary tool to justify the outrageous payments.

[abelenkpe]

37. Whoa

So, you think taking away the deduction would hurt real estate here?

[libdem4life]

39. In a very big way. It reduces the purchasing power of new buyers to buy the current inventory

as the effective payment has increased, so sellers can not sell and pay off their current mortgages or lose a percentage of their initial down payment...whether equity or cash. And many in the high-priced areas, buyers including FHA buyers, were qualified at over 50% to gross income...at least then, don't know about now.

That is the exact description of the last Bubble. It just happened through rate reduction, rather than mortgage interest deduction.

[RomneyLies]

7. I would be unable to afford my home without the deduction.

The loss of the property tax deduction would put me on the stret, too.

[Hoyt]

16. I think most middle income folks overvalue the taxes saved through the mortgage deduction.

Let's say you have a 250,000 mortgage and you are in the early years of a mortgage with a 4% rate. Thus, you are paying something like $10,000 in interest (first few years). Now depending upon your taxable income, that $10,000 "saves" you what -- $1000 to $3,000 in income taxes. The $3000 would be for folks with pretty decent incomes.

I'm not minimizing it at bit, but I think what those that want to eliminate the mortgage deduction are talking about is raising the standard deduction somewhat to compensate to some degree.

In any event, they aren't likely to throw out mortgage deductions for most of us -- it's too ingrained in the way we think about investing in houses. They might cap it, but they won't eliminate it unless they "give us a nice gift" (while screwing us in other ways).

I'm glad to have my mortgage deduction, but it is truthfully just another loophole that a lot of us take advantage of. "Loophole" has a bad connotation when someone else gets the benefit. When we get the benefit, we think it's OK.

[Travis_0004]

20. I agree with this

Your math is right on, although right now interest rates are low, and houses are affordable. In a few years interest rates will be back up, making houses less affordable and making the interest deduction more valuable.

Also, there is one thing you didn't mention (which makes the mortgage deduction less valuable). A lot of people without mortgages use the standard deduction, but the mortgage deduction requires people to itemize.

Lets say a husband and wife (w/o a mortgage) claim a standard deduction of 11,900.

The decide to buy a house, and their mortgage interest is 10k a year, and they have other deductions of 7k. They can no claim a deduction of 17k, which is only an improvement of 5.1k over the standard deduction. A few years down the road, this couple might find that the standard deduction is higher then itemizing, in which case they don't get a mortgage deduction.

On the plus side, if the benefit is limited, then so is the cost, so I would favor keeping it, just don't allow a second home to be deducted.

[abelenkpe]

22. I don't think one could buy a garage in LA for 250,000

This is why I rent.

[Hoyt]

27. Price of living in a cool place.

If one can afford a $650,000 house, they can squeeze out a few extra thousand in taxes. Well most should be able to anyway.

Those that vastly over-borrowed - well I feel for them.

[abelenkpe]

36. No, it's the price of living where one can find a job.

Other options: Vancouver, San Francisco, New York, London. LA is the cheapest option.

[unblock]

21. let's do some rough math. it's not unreasonable to pay a quarter of your income on mortgage

and nearly all of that's interest at first.

say you're in the 25% tax bracket, and you have a 6% state tax as well, so 31% combined. so now you're paying an extra 7.75% of your income on top of your regular taxes because of this deduction going away.

if they took it away entirely (which i can't imagine they'd actually do) this would be a HUGE tax increase for many of those affected.

of course i'm simplifying the math, but the point remains; this is a HUGE tax increase on many homeowners, especially those with new mortgages.

i did a dry run on turbo tax -- my own federal taxes would go from an average of 17% of my adjusted gross income to 20.5% of my adjusted gross income. this is a 20% increase in my federal tax bill. didn't even look at state taxes.

[Hoyt]

23. Not really huge. After deductions, let's say you have a taxable income

of $50,000. You'd pay an extra $1750 in taxes(3.5% x 50,000). Significant, but not huge.

I think we could figure out a way to compensate most folks while beginning to phase out the deduction. But, politicians don't have courage to change how our economic/fiscal system works - so it won't happen.

[unblock]

35. not huge? that's 3.5% of ALL income, not marginal income.

replacing the 25% bracket with a 35% bracket, would only be $1500.

so a rate hike of 10 percentage points is less in this case.

[Hoyt]

41. So one has taxable income of $300,000 -- I think they can squeeze out $10,500 in additional taxes.

One might have to adjust a bit, but I think most can make it by adjusting other aspects of their budget. Plus, I don't really think it will be that bad.

[Lex]

24. "proposed reducing the limit on the deduction to $500,000 of a home's value"

I don't think this will affect most middle class folks.

[Warren Stupidity]

28. Gee that really depends on where you live.

In the major metro areas housing is really expensive.

[Lex]

30. you still get the deduction to $500,000 of a home's value - it's not like NO deduction

[cthulu2016]

25. That article seems mostly wrong

[Ilsa]

29. Limit the deduction to only one home. nt

[beyurslf]

33. I sold my home this summer because I was underwater and got a great deal to get

out when I could. But, in the years I had my house, I never used the deduction. I had better deductions with my kids without itemizing so I never needed it. I am probably in the working class not middle class I suppose.

[libdem4life]

34. Mortgage deductions in the 8-12% interest days in the 80s-90s real estate bubble were significantly

larger and a major tool for the escalation in prices. The reduction of the interest rates/value of the mortgage deduction/was parallel to the reduction/deflation in prices. In Northern California, everywhere but San Francisco, values dropped 40% or more...driven solely by "lower" interest rates. A buyer is qualified for a "payment".

Erasing or even reducing the deduction is social, political and economic suicide. It is the deduction itself that justifies a significant part of the qualification to purchase and the ability to repay. The housing purchasing power would plunge, along with prices/values and scores of people would be upside down on their mortgages/payments...and we know where that leads.

[L0oniX]

38. Most people can't deduct morgage interest because it isn't more than the standard deduction.