Losing the mortgage interest tax deduction?

It is possible.

A tax break that has long been untouchable could soon be in for some serious scrutiny.

Many home buyers deduct their mortgage interest when assessing their tax bill, a perk that has helped bolster the income of millions of families — and the broader housing market.

But as President Obama and Congress try to hash out a deal to reduce the budget deficit, the mortgage interest deduction will likely be part of the discussion.

Limits on a broad array of deductions could emerge in any budget deal. It is likely that any caps would be structured to aim at high-income households, and would diminish or end the mortgage tax break for many of those taxpayers.

Frankly, if there are to be tax increases, I prefer this kind over general rate increases. For one thing, I can think of no reason to tax renters and those who have paid in full for their homes at a higher rate than those with mortgages. Secondly, the existence of this deduction is one of the causes – although a minor cause – of the housing bubble. Finally, I am generally opposed to using tax policy to drive specific behavior. It is just another way in which the federal government attempts to control the activities of the citizenry. Tax collection should be for revenue generation and nothing more.

The end of this deduction would further depress housing prices but historically low mortgage rates today would minimize that effect. I see no real net benefit to artificially high housing prices anyway.

The right thing to do would be to eliminate this deduction in exchange for a commensurate decrease in income tax rates. That, of course, isn’t going to happen. I am hoping these sort of increases can be traded for the stabilization of current rates rather than the end to deductions AND a rate increase.

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12 Responses to Losing the mortgage interest tax deduction?

  1. Bman says:

    If that is going to be the case, then renters are going to see an increase in their rent.

  2. R.D. Walker says:

    Why? Owners of houses they rent out can’t deduct mortgage interest today. The deduction only applies to the house you live in 180 days a year or more.

  3. Bman says:

    So? People will want to make up the money somehow. They will raise rents on their rental properties. They do the same thing when property taxes are raised. They simply pass it on.

    I own a duplex. I live in the building and have a renter. I am able to deduct half of my interest. I would want to try to maintain my standard of living. If I am no longer allowed the deduction, why would the guy renting get off scott free? Just thinking out loud.

  4. R.D. Walker says:

    Okay, in that regard you are right. Tax increases cause all prices to increase and this is a tax increase.

    I guess I was looking for the direct connection. You are correct.

  5. Bman says:

    Can you say that last sentence again, please? ;)

    Damn right it’s gonna be a good day! (just joshin’ ya).

  6. R.D. Walker says:

    Given the choice of tax increases, I would still prefer to see deductions phased out than rate increases for the reasons I listed above.

  7. sortahwitte says:

    As a young man many years ago, deductible interest on home loans was being touted as an incentive to home ownership. Applying for a loan was no small deal. They looked at your fiscal prostate. The theory, at the time, that a person with investment in real property would be a better citizen. He would take care of his property. He would vote in all elections. He would be involved in the education system. He would give a shit, at least locally.

    In recent history all you had to do to get a home loan was be breathing fairly regularly. Maybe that deduction should be looked at seriously. Of course, whatever gain is realized at “our” treasury will be gone in a split second like a fart in a whirlwind. Must take blood pressure medicine and fill sandbags.

  8. Roy Ryder says:

    I’m far to cynical to believe that any deduction eliminated will result in a concurrent reduction in overall taxes. This is part of an overall trend (unintended or otherwise) to make the middle class a propertyless class, and therefore one that theoretically consumes less. Time magazine had an article about how renting items and property was better than owning because it was less expensive and better for the environment. They neglected to point out that property is one of the mainstays of the American dream – so much so that Thomas Jefferson initially penned the line “life, liberty, and the pursuit of happiness” to read “life, liberty, and the pursuit of property”.

  9. Matt says:

    Roy, a slight correction which merely underscores your point–what Jefferson had initially penned was actually “life, liberty, and property”. Hence, not merely the pursuit of it, but the actual possession of it.

  10. RUDE JUDE says:

    “For one thing, I can think of no reason to tax renters and those who have paid in full for their homes at a higher rate than those with mortgages.”

    I have to disagree with you there R.D. We worked hard to pay off our house and it was a short term goal of ours and we are proud of it. I don’t think paying more just because of an accomplishment such as that is feasable. We’ve ended up paying the feds every year since we’ve paid it off anyway. No breaks for DINKs either. Double Income No Kids. We seem to always get the shaft for that too.

    • R.D. Walker says:

      Actually I think we’re in agreement Jude. You are now being denied the tax deduction. Your being penalized for paying off your house. That is my point. The mortgage tax deduction only applies to people with mortgages. You don’t have one so you have to pay more than people who do. Your thrift and responsibility is being penalized.

  11. RUDE JUDE says:

    OK, I got it now R.D. Sorry for being confused. I just get so worked up when we get penalized for being responsible adults. I totally misread your statement because I was cross eyed with anger about the whole thing. Thank you R.D. :)

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