Mortgage deduction

[wilt the stilt]

Next time a right winger comlains about entitlements ask him or her to not take the mortgage deduction on their taxes.

[speltwon]

1. Fwiw, this is a deal breaker for me...

I will probably vote against anybody who supports repealing the mortgage deduction.

Otoh, the mortgage deduction doesn't meet the definition of an "entitlement", just like social security doesn't. Neither are entitlements. I believe that as part of our social safety net, we SHOULD have some entitlements, however... the mortgage deduction is not an entitlement in the first place.

[uncle ray]

11. sure sounds like you are treating it like it is.n/t.

[speltwon]

46. Nope. Here's the distinction

I made an important INVESTMENT decision based on the deduction. I would have made a different investment decision (a different mortgage, house etc.) if it wasn't there. The mortgage interest deduction is no more an entitlement than the lower tax rate for capital gains vs. income is. It's about tradeoffs, and if they change the rules in the middle of the game, I call foul. If they changed the rule for all NEW mortgages, that would be different.

It's not an entitlement, it's a tax structure based on one type of investment vs. another.

[former9thward]

2. The mortagage decuction should be repealed.

It is corporate welfare for the banking and real estate industry. It causes the prices of houses to be inflated beyond their worth ("Look at all the money you will save by taking the mortgage deduction!"). If the deduction were eliminated the houses would come down in price because people would not be tricked into taking loans which they can't afford. Get rid of it.

[badtoworse]

7. Wrong on two points

First, it doesn't help banks at all - they charge the same rate whether you deduct interest from your taxable income or not. It does help a potential homeowner by lowering the net cost of owning a home. Second point, I don't see how people are being "tricked" into taking out loans they can't afford and why would a bank want that? If you can't afford a loan and default on it, then the bank has to foreclose on the house and they'll probably lose money. If you're too dumb to make an intelligent decision about whether you can afford a mortgage, you shouldn't be borrowing money - period.

[One_Life_To_Give]

9. Brokers/Originator don't care if Loan repaid

Fees for the Mortgage originator are paid upfront with the closing costs. True the Actual Lender suffers from a default. But by that time the originator is long gone from the transaction.

[badtoworse]

10. So what? The bank makes the final decision about whether to lend money

[One_Life_To_Give]

12. Based on what the originator tells them

No investor intentionally bought bad paper. It was all funneled thru changing hands several times before being sold as securities for investors. Hence the culprits had plausible deniability for passing the bad paper. In the end they stuck the bill to the US taxpayer. While the real culprits likely retired to the Hamptons.

[badtoworse]

15. Maybe the banks did crappy due diligence or maybe the originator committed fraud.

The fix for those problems is not to bail out the banks and to prosecute fraud if and where it occurred. That is unrelated to whether mortgage interest should be deductible for the borrower. Do you see it otherwise?

[One_Life_To_Give]

19. Deduction based upon double taxation

The Mortgage Crisis is separate from the Tax Issue.

The former results from a system that placed rewards upon certain transactions without sufficient oversight to ensure that impropriety wasn't taking place. Such as accurate rating of mortgage backed securities. And our legislative history of allowing large corps to Privatize Profits while Socializing Losses.


Interest deduction on taxes was to prevent the money from being taxed twice. Once by the Payee and again by the Lender. During the Regan administration the rules were changed and most loan interest became no longer tax deductible. The exception being the Interest on Primary Residence and a secondary residence. Then the Tax lawyers found ways to start incorporating Home Improvement loans into Mortgages and others went further buying big ticket items with mortgage money. Going back to the Pre-Regan view IMO is the right choice. Let everyone get the deduction for Interest and avoid paying tax twice on the interest.

[badtoworse]

21. I can't argue with that

[1monster]

25. Sorry chum, but us poor folks who are holding on to our homes by the finger nails use

the mortgage interest deduction tax. Sure, it's only a little over $2,000 per year that I'm saving from adding to my income taxes, but every little bit helps.

[JoePhilly]

3. If they change it, lots of middle class folks will see a HUGE tax increase.

You'd have to phase it out, over time because people who bought their home calculated that into the decision, and you have to give them enough time to make a change. And in this housing environment, selling or refinancing is very tough for the middle class.

A wealthy family will have no problem restructuring their debt.

[gratuitous]

4. How about capping it?

Limit the deduction to $10,000 annually, or to one mortgage.

[Gormy Cuss]

51. Or turn it into a credit

based on adjusted gross income.

[WolverineDG]

59. It's already limited to the mortgage on your primary residence

which for most homeowners is the only real estate they own.

Anyone who votes to repeal this deduction loses my vote.

dg

[taught_me_patience]

5. Mortgage deduction is regressive

but many DUers support it, but cry about other regressive taxes.

[badtoworse]

8. What's regressive about it?

[Lone_Star_Dem]

14. It leads to regressive taxation

The more money a person has, the bigger a mortgage they can afford. Which means the get a larger interest deduction and thus a lower tax rate.

[badtoworse]

18. You've got it backwards

If a person has a big income, the mortgage interest deduction has a lower impact on their taxes (on a percentage basis)than someone whose income is moderate.

[Statistical]

16. It dispropritionately benefits those who are richer.

If nothing else changed in the tax code and the mortgage deduction went away actual taxes paid (not tax brackets) would be more progressive.

It benefits me greatly but lets call a spade a spade.

[badtoworse]

20. I have to disagree

Consider two taxpayers: One Has $50,000 in taxable income and the other has $200,000 in taxable income. Both have an $8,000 mortgage interest deduction.

For the $50,000 taxpayer: Without the deduction, he would have $58,000 in taxable income and would owe $7,862 in federal income tax. With the deduction, his taxable income is $50,000 and he pays $6,662. He saves $1,200 in taxes or 15.3% of his total tax bill.

For the $200,000 taxpayer: Without the deduction, his taxable income is $208,000 and he would owe $46,483 in federal income tax. With the deduction, his taxable income drops to $200,000 and he pays $44,243. While he saved $2,240 in tax, it only dropped his total tax bill by 4.8%

As to whether this is regressive, I would argue it is not. The lower income taxpayer gets a far greater benefit on a percentage basis than the higher income taxpayer. To put it a different way, eliminating the deduction is equivalent to a 15.3% tax increase for the lower income taxpayer versus a 4.8% tax increase for the higher income taxpayer. That does not sound very progressive to me.

Edited to add: I assumed married, filing jointly to calculate the taxes.

[lumberjack_jeff]

27. A person with a $200,000 income probably owns a home worth more than $150,000. n/t

Make a realistic example; the wealthier taxpayer has a $25,000 mortgage interest deduction.

Heck, if the wealthier taxpayer paid the same share of his income to mortgage interest, his deduction would be $32,000.

[badtoworse]

50. Sorry, but you are making an arbitrary assumption

The only fair comparison is on the same house with the same mortgage - an apples to apples comparison. If you do that, it comes down to the difference in marginal tax rates on the same deduction. With different houses and and different interest deductions, you're not comparing the same thing.

[taught_me_patience]

28. The couple with $200k income will have much more than $8k in mortgage interest

Secondly, renters get no deduction at all and renters are more likely to be lower income.

[badtoworse]

49. See my response to Statistical

Renters can take the standard deduction. That's what I did before I bought a house

[xphile]

58. The standard deduction has nothing to do with that.

If someone's taking the standard deduction it means they didn't have enough to itemize to move them past the standard deduction in the first place. You take one or the other you cannot take both. Meanwhile they are likely paying their landlord's mortgage including the interest (or at least a significant portion of it) while the landlord takes the deduction.

However, based on your response I'm not inclined to believe that you actually care about any of that. It seems to me that what you're really arguing is that since the mortgage deduction benefits YOU you don't want to see it phased out. You got yours screw the renter.

You should at least be honest about where you're coming from when you make your argument.

[Statistical]

47. You forget two things. 1) The mortgate deduction is instead of std deduction.

2) People with higher incomes generally have larger mortgage.

So std deduction for filing msrried is $15K. The benefit of the mortgage deduction is the difference of all itemized deductions vs std deduction.

Lets take typical married couple making $60K with $200K mortgage might have $10K in interest + $4K in property taxes + $2 in other itemized deductions = $16K in deductions vs $15K for a net of $1000. In 15% bracket that saves him/her $150 in taxes.

However someone with say 10x the income ($600K) wouldn't have $200K mortgage they would have say a $500K mortgage. That is $25K in interest + $10K in property taxes. Say other deductions are also $2K. Total is $37K vs $14K for net reduction of $22K. Now if they are in the 35% bracket that is a net reduction in taxes of $7,700.

Middle class family gets a $150 tax break or 0.25% of gross income.

Rich family gets a $7,700 break or 1.3% of gross income.

[badtoworse]

48. You're getting pretty far afield into other areas of the tax code

and you are not making an apples to apples comparison. Obviously a more expensive house with higher taxes is going to result in a larger deduction. In my book, the only fair evaluation is one in which you do the evaluation on the same house with the same mortgage interest and the same taxes. If you do that, the difference comes down to different marginal rates on the same deduction and the high income taxpayer saves proportionally less.

[Statistical]

53. Given that there is a direct relationship between home price and income

it is naive at best to use one house price.

Rich people own very expensive homes = largest benefit.

Upper class people own more expensive homes = large benefit.

Middle class people own "cheaper" homes = small benefit.

Poor people rarely own any home = Get no benefit.

There have been many studies that conclude the same thing. While you (and I) may get a benefit from it the benefit the very rich get is much much larger and has the effect of flattening the tax curve. The mortgage deduction makes tax code more regressive not more progressive.

[badtoworse]

54. What you are essentially saying is that wealth disparity is intrinsically regressive

Rich people use "more of" and "better than" poor people do on virtually everything. If that is how you define regressive, than I can't argue with you. Personally, I don't see much value in pointing out that a $25,000 tax deduction is worth more than a $10,000 deduction - that's pretty obvious. The fact that a wealthy person can afford to spend more on mortgage interest is the result of the wealth disparity, not the tax code.

[Statistical]

55. No the taxes reduced as a % of income are also higher.

Obviously in nominal terms any break for the rich will be larger BUT what makes it regressive is in % terms it is ALSO larger.

Be in denial if you want many comprehensive studies have been done on this. The % benefit rises with income the very definition of regressive.

[badtoworse]

56. I'd be interested to read if you have any citations - nt

[One_Life_To_Give]

6. Does a buisiness pay it

Or is interest an operating expense that gets deducted from profits?

Perhaps we should instead reinstate the deduction of interest for all loans. Since presumably the lender is paying taxes on the Interest.

[SoCalDem]

13. Should be:

1) for primary residence ONLY
2) upper limited to no more than 500K loan/income 300K
3) no equity/2nd mortgage deductions/LOCs

Homes would once again be HOMES..not "investments".. housing would become more affordable again.

[Earth_First]

17. +1 n/t

[Sirveri]

23. This is identical to one of the fiscal commission proposals.

Mortgage interest deduction for primary home, capped at 500k.

[slackmaster]

26. How would rents be affected if the mortgage interest deduction for rental properties was abolished?

Homes would once again be HOMES..not "investments".. housing would become more affordable again.

The tax increase on tens of millions of existing mortgage holders would not be good for the housing market or for renters.

I don't agree that housing would become more affordable. The mortgage interest deduction is invisible to lenders and home sellers. They'll keep charging whatever the market will bear.

[SoCalDem]

30. In the pure sense of rental-ownership

the tenants are BUYING the property for the landlord.

PITI= 1000.00.......rent = $1500.00 has profit which is taxable (less expenses of course), and at the end of the day the landlord ends up owning the property free & clear or if equity builds, making a profit from selling it.

Rampant speculation is why we are where we are.. Too many people borrowed to buy too many investments.

[slackmaster]

35. I think the bigger problem, which is one of speculation, was people thinking of their own homes...

...as investments.

Renters fundamentally get screwed no matter what tweaks are made to the system.

[SoCalDem]

For YEARS, there was a renter's deduction on income taxes

which did help somewhat..and you did not have to file a long form to get the deduction.. we used it for years.

Of course that one went away.. along with the deductibility of ALL interest paid..

[slackmaster]

44. I rented from 1977 - 1994. IIRC it was a tax credit of a fixed dollar amount.

I remember there used to be a "renter's credit" on both federal and California state income taxes, and that the federal credit was eliminated in the mid-1980s along with deductions for interest on consumer loans. IIRC it was a fixed amount and less than $200. The state credit was $60.

[NutmegYankee]

38. THAT was a major problem.

I bought a house so I could have a little land for my personal use and a place to live. Done right it is cheaper than renting.

[Nye Bevan]

22. It discriminates against renters (who tend to be poorer). It should be abolished.

Obviously the progressive thing to do is to eliminate the mortgage deduction. However, since so many DUers benefit from it, this view never gets much support here.

They got rid of it years ago in the UK and their housing market is doing just fine.

[slackmaster]

24. Let's do a thought experiment. Suppose the mortgage deduction was ended across the board...

No grandfathering. Everyone who was eligible for it is no longer, and taxes will suddenly increase by hundreds or thousands of dollars per year for most people who have mortgages.

Some of those people own rental property, which is a source of income for them. What do you believe those people will do to offset their increased taxes?

You get three guesses, and the first two don't count.

[taught_me_patience]

29. Rent is not cost plus

Rent hardly moved during the housing bubble, even in inflated cities, because rent is tied to income. Owners will charge as much as possible for rent, regardless of their costs.

[NutmegYankee]

31. Now that is not true. At least not here in CT

From http://www.cga.ct.gov/asianamerican/Documents/Housing%20in%20CT%202010.pdf

The “housing wage”—what
someone must earn per hour to afford a typical 2-BR apartment without
having to pay more than 30% of his income on housing—grew to $23 per
hour in 2010, up from $15.67 in 2000.(5) Of the 683 occupations tracked by
the state’s Department of Labor, 337 have an average wage that is less than
the housing wage.(6)

I watched the rents rise several hundred dollars over this past decade.

[taught_me_patience]

37. The rising rent was driven by increases in income.

Both from rising income and shifts in population in different locales. Also, a decade is a long time. If rents rose from $1,000 to $1,200, a 20% gain, that would be less than 2% per year average gain... about inline with income growth.

[NutmegYankee]

41. Income growth? What income growth?

Oh, right, WALLSTREET! I don't live there.

[slackmaster]

33. Nobody likes operating a business at a loss for an extended period

Removing the mortgage interest deduction for rental properties would undeniably have a negative effect the balance sheets of people who have mortgages on their rental properties. If the business of buying properties and renting them out becomes less lucrative, investors will put their money elsewhere. That would result in fewer available single-family rentals, and multi-family buildings converted to condominiums, i.e. reduced supply, which would put upward pressure on rents.

The idea that curtailing mortgage interest deductions would lead to more affordable housing is IMO wishful thinking.

[Nye Bevan]

32. OK. So we should never increase taxes on the rich

because they might happen to own rental properties and might increase the rents to make up for the increase in their taxes.

Got it.

[NutmegYankee]

34. The tax deduction elimination would hurt the middle/working class.

Or are all homeowners "rich" to you?

[SoCalDem]

39. not many "middle class" people have $500K mortgages or miultiple houses.. n/t

[NutmegYankee]

40. Then modify or limit it so that it is used by those who need it. nt

[SoCalDem]

42. Currently that is exactly what is being spoken of and proposed.. n/t

[NutmegYankee]

43. If I recall correctly, the Debt Commission proposed eliminating it.

I just know my neighbors would be wiped out. They are barely hanging on as it is.

[Gormy Cuss]

52. IIRC , the Debt Commission proposed to eliminate it for all but primary residences and to cap it

based on the size of the mortgage, with full deduction of interest on a mortgage of up to 500K and partial deductibility up to 1M.

[slackmaster]

36. That's a ridiculous straw man

Most rental properties are not owned by people who are fabulously wealthy. A typical landlord is an older retired or semi-retired middle-class person who leveraged equity in a long-held home to buy rental property.

[Nye Bevan]

45. Rental property owners would still be able to deduct the mortgage interest

from the rent.

[PDittie]

57. Thanks all for a stimulating discussion

Some people have been pestering me to blog about the MID so I finally did, and excerpted some of your comments and give-and-take:

http://brainsandeggs.blogspot.com/2011/03/mortgage-interest-deduction-for-or.html

I would welcome your input as well there, if you please.