Mortgages Blog

Finance Blogs » Mortgages Blog » Mortgage tax break ‘in play’

Mortgage tax break ‘in play’

By Marcie Geffner ·
Wednesday, July 27, 2011
Posted: 11 am ET

Tick. Tick. Ticktickticktickticktickticktick.

That might be the sound of the fast-approaching deadline for the federal government to raise the national debt ceiling prior to a default on the government's obligations.

Homeowners, homebuyers and home sellers might well wonder what that has to do with real estate, housing or mortgages; however, one possible answer is the mortgage interest deduction, a cherished line item on many homeowners' federal income tax returns.

To steal a turn of phrase from the National Association of Realtors, the deduction is believed to be "in play" as part of the deficit reduction talks that have become tangled up in the debt ceiling debate.

While the crisis unfolds, homeowners have little information about what, exactly, is contained in the multiple debt and deficit proposals. Indeed, as the Realtor group noted, the negotiations "continue to generate rumors, inconsistencies, uncertainty and contention."

What is known is that the mortgage interest deduction has been on the table at least since December 2010, when President Barack Obama's Commission on Fiscal Responsibility and Reform, known as the Deficit Commission, recommended that the deduction be repealed, capped, eliminated for second homes or turned into a tax credit.

Realtor groups are quick to argue that the deduction, which they refer to as "the MID," is a powerful way to encourage people to buy and own their own homes. That explains why these groups have issued multiple "calls for actions" to their members, warning that real estate's most sacred cow is at risk of slaughter.

Of course, many taxpayers don't own a home, don't itemize their tax deductions, own a home but don't have a mortgage, or own a home and have a mortgage, but pay only little interest and don't have enough itemized deductions to exceed the standard deduction. None of those folks benefits directly from the mortgage interest tax break. That said, however, many homeowners do itemize and take advantage of it. Depending on the size of the mortgage and the interest rate, the savings can be substantial.

Still, critics also point out that the deduction is an expensive missed opportunity for the federal government to collect more tax revenue. Opponents also say the deduction is an unwarranted perk for people who just happen to own their own home.

Follow me on Twitter: @marciegeff

Bankrate wants to hear from you and encourages comments. We ask that you stay on topic, respect other people's opinions, and avoid profanity, offensive statements, and illegal content. Please keep in mind that we reserve the right to (but are not obligated to) edit or delete your comments. Please avoid posting private or confidential information, and also keep in mind that anything you post may be disclosed, published, transmitted or reused.

By submitting a post, you agree to be bound by Bankrate's terms of use. Please refer to Bankrate's privacy policy for more information regarding Bankrate's privacy practices.
September 13, 2011 at 9:28 am

Here's the problem with the "in-play" mortgage interest deduction. It's Lucy's football. Just when Charlie Brown comes racing towards the ball to kick it, Lucy yanks the ball away and Charlie Brown falls on his a**. Buyers make a purchase decision for a home with budgetary considerations, INCLUDING the mortgage interest deduction which whether a good or bad idea, was implicitly promised based on the fact that it has existed without any serious discussion of whether it might be phased out, or simply eliminated.

So now the government comes along, with homeowners already hit by the government-caused mortgage bubble and inevitable collapse, having lost many thousands of dollars in equity putting many who had substantial equity upside down on mortgages they had been paying on for many years. Now saddled with homes they cannot refinance because they do not have sufficient equity to do so, and much higher than market rate interest, are told that their monthly housing outlay is going even higher.

So now we have literally millions of homeowners who had been paying religiously on their mortgage, even when upside down on them through no fault of their own, who are asking themselves why they should continue to do so. Why not just walk away? So now you have millions of additional empty homes, a drug on the market, lowering home values even more, causing more mortgagees to become upside down, asking themselves, "why not just walk away?" Millions more homes on the market, lowering prices even further, and now more homeowners asking, "why not just walk away?"

Meanwhile, back at the ranch, construction workers, who have been unemployed and struggling for years now, zero chance for future employment in the trade they have worked in for years, with a home they can no longer afford, saying, "why not just walk away?"

The mere discussion of removing the home interest deduction will cast a pall over the home building industry and may be the tipping point driving this country into a full blown depression (if we are not already there).

We need a serious discussion of spending priorities at the federal level and start slashing our bloated government and all its wasteful spending on stuff no one wants and we certainly cannot afford now, if indeed we ever could.

This should happen long, long, before any defacto tax increase (which the mortgage interest deduction elimination really is) is on the table.

Maybe Obama and Michelle could cut a few vacations, or pay for the cost themselves, first?

September 09, 2011 at 12:18 pm

The real debate here in America is are we really living in a free society or one whom we work for the federal government. I am one of those folks whom pay 35% in income taxes, also self employed so I pay both sides of SS tax. Figure i work a 5 day work week. At 35% federal tax rate I am effectivly working all day monday and all day tuesday except the last hour of work. A 40% tax rate would be exactly all day tuesday and all day tuesday. The federal government is currently borrowing 42 cents of each dollar they spend, so if the feds taxed me for what they are spending, I would be working all day monday, tuesday, wednesday and 3 hours on thursday. This does not even mention paying anything on the 14 trillion debt. Instead of us tax payers and non tax payers finger pointing and blaming each other for not paying enough taxes we would be much wiser to look at our congress, yea the guys with an approval rating of less than 10% of all voters. We should engage in a COMPLETE house cleaning of the current members and then demand changes in the way congress operates, the good old boy club we currently have simply allows only long term established congressmen to run the entire show. Newly elected folks, the ones with freash ideas sit with hat in hand waiting for their day when they will be long termers. By then they are crooks like all the current long term members we have now.

September 08, 2011 at 2:55 pm

What is to prevent upside-down homeowners paying mortgage interest from foreclosing immediately when they lose the last benefit having a mortgage confers? What incentive do buyers have to obtain a mortgage when they can do the math and come to the conclusion that without the interest deduction, renting makes more sense for the near to mid-term future?

Why on earth do our representatives want to create more disincentives to purchasing homes? Its like they WANT to keep the construction and real estate sectors stagnant.