Eliminate the mortgage interest tax deduction?

[rwh11385]

http://www.fool.com/investing/general/2010/11/23/2-huge-misconceptions-about-killing-the-mortgage-i.aspx

Mortgage interest deductions cost the Treasury as much as $130 billion per year in lost tax revenue. Consider just how much that is. If the cost of subsidizing mortgage interest were a line item in the federal budget, it'd rank as the seventh costliest -- just ahead of education and veterans benefits. The federal government spends more money subsidizing mortgages than on anything other than defense, entitlements, unemployment insurance, and interest.

The Tax Policy Center crunched the numbers and found that a complete elimination of the mortgage interest deduction would raise taxes on only 21.5% of middle-income workers, with an average increase of just $215 a year. The bulk of the increase would fall on the top 10% of wage earners. It's about as progressive as it gets.

Since only those who itemize deductions gain from the credit, the answer is likely no. If you itemize deductions, you're probably relatively wealthy. And if you're relatively wealthy, you're probably going to own rather than rent regardless of tax incentives.

There are good historical examples backing this up. Homeownership rates in the U.K. actually rose after it eliminated a mortgage interest deduction in 2000, from approximately 70% to around 72% by 2005. Furthermore, homeownership rates in the U.S. are roughly equal to those in Canada and Australia, both of which don't allow mortgage interest deduction. The correlation between mortgage interest deductions and homeownership rates seems elusive.

Here's another example: Credit card interest used to be tax deductible until President Ronald Reagan signed the Tax Reform Act of 1986. If you follow the logic of those protesting elimination of the mortgage interest deduction, this should have caused credit card balances to drop as the benefit to borrowers diminished. Instead, balances grew 11% between 1986 and 1987.

[Pac1373]

We do not have a Mortgage tax deduction in Canada. ask me how envious I am of my American friends who own their homes, go ahead, ask me.

I can see how you would not want to loose that.

[Todd Black 88]

Its different up here though. Afaik in the US they can deduct the interest of the mortgage from thier personal taxes, but they have to pay capitol gains style tax on the property if they sell it for more then original purchase price.
In canada, we cannot deduct the interest but any profit from the sale of your personal residence is tax free. Its how i was able to buy my forst house after selling my town house. Town House sold for $250k more than i bought it for, three years later.

[rwh11385]

How envious are you??

I actually am on the side that it ought to be eliminated. Few really benefit much from it and provides plenty of confused/twisted logic for buying a house people can't afford for maybe getting a small tax benefit. Why should the US subsidize people going into debt?

Even still at my 3rd year of home ownership (paying nearly the most interest ever), I save all of $150 bucks. You only benefit it you have enough itemizations to cross the threshold that itemzing benefits you, and the end benefit is only a fraction of the interest you pay. (marginal tax rates and it being a deduction off of income, not a credit)

[z31maniac]

I get much more back than that and I only spent $98,900 on my house, 30 yr/note, 5.5% interest. I'm in the 25% tax bracket.

I use taxact.com to do my taxes and it gives me a running total of my refund once W2s, deductions, etc. are entered.

For 2011, I got back about $900 once I entered my mortgage interest of $5600.

Considering the avg home price in the US is much higher than $99k, I have a hard time believing the low numbers they are quoting (or are people in the 15% bracket really buying $200k homes?). I realize paying $5600 to the bank to get $900 from the gov't is stupid, but I didn't buy a house for the mortgage interest deduction, I need a place to live and don't want to rent.


That being said, I'm all for eliminating it.

https://www.fairtax.org

[ainadude]

Quoting from your source:

"The Tax Policy Center crunched the numbers and found that a complete elimination of the mortgage interest deduction would raise taxes on only 21.5% of middle-income workers, with an average increase of just $215 a year. The bulk of the increase would fall on the top 10% of wage earners. It's about as progressive as it gets." (emphasis is mine)

--

Google the facts and you'll discover (or be reminded of) the following: according to the federal government's own figures: the top 10 percent already pays 70 percent of income taxes. So, yes, by all means: let's get more progressive with those greedy bastards, especially now that almost half the population pays no income tax whatsoever.

Disclosure: I don't have a mortgage anymore, having severely downsized when I lost my job a few years ago (I've since found employment, thank you very much). Nor have I ever been one of the vaunted 10 percent. So I don't have a dog in this fight, apart from a different -- I would argue more reasonable -- sense of fairness.

[smooth]

bizarre sense of fairness

[Jorgen]

I like my interest deduction. I think it would make a dramatic difference in some people home buying decision making process. I know that this deduction for me is a very sizable portion of my return.

The only real benefit that I see from the loss of this deduction is that it would encourage people to pay their homes off more quickly in some cases. I already over pay my mortgage every year but it I knew that I wouldn't recieve this deduction on my taxes it would encourage me to pay it off even faster. That $8k/year in interest isn't something I want to just give away forever. If they got rid of that deduction you know it would eng up just being replaced by something else. A homeowners deduction or something that you got to claim your house as a dependant or something. Simply removing this deduction will never happen, it would raise taxes on a decent amount of people and I believe more than you are showing in the figures there. I believe that it is already slowly taken away the higher you earn and eventually you may not be able to take it at all which I am fine with.

Edit: Looking up stats a little more I guess I barely fall into that top 10% category so I guess everyone thinks I should pay more in taxes anyway because I am such a rich SOB and such(believe me I pay enough already if you ask me).

[z31maniac]

Or is my refund coming from the standard deduction?

[rwh11385]

Or is my refund coming from the standard deduction?

Married standard deduction for 2011 is $11,600 based on quick google... So you'd have to have a lot of other itemized deductions to benefit from the mortgage interest deduction.

[Pac1373]

How envious are you??

I actually am on the side that it ought to be eliminated. Few really benefit much from it and provides plenty of confused/twisted logic for buying a house people can't afford for maybe getting a small tax benefit. Why should the US subsidize people going into debt?

Even still at my 3rd year of home ownership (paying nearly the most interest ever), I save all of $150 bucks. You only benefit it you have enough itemizations to cross the threshold that itemzing benefits you, and the end benefit is only a fraction of the interest you pay. (marginal tax rates and it being a deduction off of income, not a credit)

Yikes, I may be very under informed of the benefit of the tax deductions, especially if what Todd was saying about Capital Gains type taxation on the sale of your home is true?
I can't Imagine paying taxes on the sale of my personal home, I have sold 4 and easily would have WAY offset any Mortgage interest deduction if that is true.

[mabeer]

Tax code is also used for social engineering. The government deems home ownership is positive for the country so you have a mortgage interest deduction. they want to encourage charitable contributions so we have a charitable contribution deduction.

As for Canada not paying gains but also not getting a deduction we've got an exclusion of $250K for singles and $500 if you're married filling joint. On gains from sale.

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[Pac1373]

Tax code is also used for social engineering. The government deems home ownership is positive for the country so you have a mortgage interest deduction. they want to encourage charitable contributions so we have a charitable contribution deduction.

As for Canada not paying gains but also not getting a deduction we've got an exclusion of $250K for singles and $500 if you're married filling joint. On gains from sale.

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I assume in the more reasonable Real estate markets, that exemption would probably cover the Vast majority of homes sold.

I actually think that Canada WILL tax you on the sale proceeds of a home if you sell it within 2 years of purchase, unless you are selling due to employment (trying to tax or dissuade short term house Flipping)

mind you, Mortgages are just plain harder to get now as well.

[nrubenstein]

Tax code is also used for social engineering. The government deems home ownership is positive for the country so you have a mortgage interest deduction. they want to encourage charitable contributions so we have a charitable contribution deduction.

As for Canada not paying gains but also not getting a deduction we've got an exclusion of $250K for singles and $500 if you're married filling joint. On gains from sale.

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The truth is that it's a very short term benefit. The long term impact is that it inflates home values. Most people buy homes based on what they can afford to spend in a month. (or can't, really.). The mortgage deduction, just as the absurdly cheap Fannie/Freddie loans do, just serves to make payments more affordable and therefore increase the amount of house that your average W2 worker can afford. Since the number of people in need of housing hasn't changed, all that really does is increase prices in the long term. It works great for a little while, until normal is reset though.

[z31maniac]

Married standard deduction for 2011 is $11,600 based on quick google... So you'd have to have a lot of other itemized deductions to benefit from the mortgage interest deduction.

Married filing separately in our house. Would be a huge pain to jointly file since she is self-employed.