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Mortgage tax break on the block

By Holden Lewis · Bankrate.com
Thursday, November 11, 2010
Posted: 10 am ET

A couple of Washington insiders want to get rid of the mortgage interest tax deduction. Normally that's not big news, because thousands of Washington insiders would like to raise your taxes (especially if they can call it "reform") while pocketing your money. But this pair of Washington insiders is more influential than your run-of-the-mill corporate cat fattening himself at the Capital Grille.

Alan Simpson and Erskine Bowles are the co-chairs of the deficit commission, formally known as the National Commission on Fiscal Words You'll Skip Over. The 18 people on the panel are supposed to send a report to Congress. Such a report would require the approval of 14 of the 18 members. Simpson and Bowles are jumping the gun, prematurely putting out a set of talking points, to pressure their fellow panel members in some way.

It's an odd set of talking points. As part of their plan to reduce the budget deficit, Bowles and Simpson suggest charging admission to Smithsonian museums. It's a laughable suggestion, because it would raise a piddling amount of money compared to the size of the budget deficit -- and anyway, have you been to the National Zoo or the Air and Space Museum? Those places will empty your wallet with a quickness.

I'd totally support the installation of hundreds of discreetly placed, frequently cleaned pay toilets on the National Mall, though. Can I get a high five on that? Thought so.

My long way of saying that the Simpson-Bowles talking points aren't very serious. They talk of shared sacrifice, yet propose cutting taxes on the high-earning Wall Streeters who took our bailout money and then rewarded themselves with huge bonuses while the unemployment rate skyrocketed. While the Masters of the Universe would get tax cuts, middle-class homeowners would lose the mortgage interest tax deduction.

In principle, I think the mortgage interest tax deduction should be phased out, because it distorts real estate prices and encourages people to buy more house than they can afford. There's an issue of generational equity to work out, though -- it's unfair to tell future homebuyers, "You can't have the tax deduction that generations of your forbears enjoyed."

The Mortgage Bankers Association complains that the timing is bad: "Given the fragile state of the nation's housing market, now is not the time to be scaling back incentives for homeownership," the MBA says.

The National Association of Realtors hasn't reacted. I expected a Linda Blair-type reaction, with spinning head and split-pea soup, but nada. Maybe the Realtors are nursing a hangover from their annual convention, which was in New Orleans and ended this week. They called it NARdiGras 2010. Party like it's 1932, dudes!

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24 Comments
Richard
January 03, 2011 at 1:02 pm

The mortgage interest deduction should absolutely be eliminated.

To respond to those who claim that this would require changes in the tax code, you're right, we also need to greatly simplify the tax code (see the Fair Tax for an example of how this could be done). Far too much effort is collectively spent (wasted) on documenting, understanding, and enforcing the current monstrosity of law that is our tax code. The middle class bears the brunt of expenses related to tax preparation. Switching to a system of consumption-based taxation would not only eliminate most of the IRS, it would also incentivize better behavior in general.

Chef Mike
January 02, 2011 at 10:19 pm

As far as I remember, Canada has never had a deduction for mortgages (by the way, how is Canada's economy ... anyone heard them crying?)... it may be a shock to the current real estate system but better to implement it now while the market is flat ... Real estate is not and has never been a commodity ... the market for housing is a needs-based economy and the mortgage interest deduction lures otherwise available dollars into rental housing which should also be provided by a demand market, not an investors market ...(although over the last two market bubbles it clearly became one ... the FHA phased out fully ... just pick up the payments ... assumable loans in the 80's for this very reason) ... real estate investors should take the same risks as any others and not have built-in immediate incentives to distort the market they cash in when the investment matures ... get rid of the mortgage deduction!!! It is defended by Realtors and mortgage bankers but that's about it ... there's no organized public group that would fight this move ... show us the money!!!

robert
January 02, 2011 at 10:03 pm

Why is there deduction given for interest paid???? You don't get interest deduction for anything else, why for a home? If you to buy a home do it, but don't expect to get tax deduction for it, I want a tax deduction for my rent then.

Curtis Arima
January 02, 2011 at 5:24 pm

Taking away the mortgage interest deduction would certainly add more money into the governments taxes received but this will hurt a big percent of middleclass taxpayers. For most people that itemize their tax returns, it mainly requires a mortgage interest deduction in order to benefit from it's use and without it most people will have to take the standard deduction. With the mortgage interest deduction, it lets the tax payer deduct other items which they can't use unless they are able to use schedule "A" like charitable donations, a small portion of your medical expenses,qulified mortgage insurance, investment expenses, State and Local taxes, etc. just to name a few.

agent99
January 02, 2011 at 3:42 pm

I am for getting rid of the mortgage deduction but it needs to be phased out. Chop it down to the same as the fha max loan over 3 years then take 5k off of it every year after until it is gone. Keep the real estate tax extra standard deduction. Done.
They need to go back to the old rule that those over 55 who sell don't pay capital gains nor do those who roll the house into another house. Either that or cap the exclusion at 100k versus 250k. Done.

Jerry A
December 20, 2010 at 4:18 pm

Much of this talk about losing the mortgage interest tax deduction is scare tactics. Look at the real numbers. Most lower income people don't itemize deductions because the standard deduction is higher. They get no benefit from the mortgage interest tax deduction. Most middle income taxpayers get very little benefit, because while they itemize, their level of deductions is not that much higher than the standard deduction. The ADDED tax deduction due to mortgage interest is only a fraction of their total. As mortgage interest drops over a few years (the first 5-10), they get less and less added benefit until they too go to the standard deduction. The mortgage interest tax deduction mainly benefits wealthier people. The whole "populist" argument of saving the mortgage interest tax deduction for the middle class is a scam. Then again, the so-called conservatives also sold the public on the tax cuts for the rich scam (proven to create no jobs) and the "death tax" scam (less than 3% of "family farms" suffer; less than 3% of all households pay any estate tax). Yet another GOP / Faux News talking point sold as news, but people who don't do the math will believe it.

Holden Lewis
December 20, 2010 at 12:27 pm

The landlord's expenses don't dictate rental rates. Market forces exert much more influence on rental rates.

There are a lot of neighborhoods with many vacant houses available for rent. In those places, the monthly rent doesn't always cover the owner's mortgage costs. But at least the owner loses less money every month when a paying renter is living in the house.

On the other hand, think of a place where the supply of vacant rental units is tight. You have two identical houses next door to each other. One house is owned free and clear by the landlord, and the other has a mortgage. Will the landlord with a mortgage charge a higher rent? No, because the market, not the landlord's expenses, is what sets the rental price.

I agree that Wall Street is eager to use the power of government to put more of our money in Wall Street's hands. Wall Street paid for our government, and wants a return on its investment.

Gwen Lebec
December 20, 2010 at 12:02 pm

So what is the purpose? To force working people who are trying to invest for their retirement back into the stock market for Wall Street's benefit? So they can be ripped off again? Perhaps a home should be a home, but what about rental properties? If the landlord's expenses increase, then rents will increase. And now that it is more difficult to own a home, what happens if you can't even afford rent? I don't for a minute believe that anyone in government, banking or finance is thinking about this as a good thing for the country. It is just another way to figure out how to make the middle class more vulnerable.

geo
November 22, 2010 at 9:31 pm

Just cap the deduction for homes costing 300K or less and do away with the second home deductions. Should not harm the "middle class".

The whole deduction scam mostly helps banks and real estate sales folks to keep prices high. A home should be a home and not an investment to turn over and make $. Reality seems to be setting in - I hope it continues.

Holden Lewis
November 22, 2010 at 10:05 am

This is a "blueprint" outlined by Alan Simpson and Erskine Bowles. Simpson is a very conservative Republican, and Bowles is a conservative, Wall Street-loving Democrat.

Do you want to know who screamed loudest about this plan to take away middle-class tax breaks? A certain liberal Democrat whose name rhymes with Fancy Belowsea. Maybe you need rethink who your true friends are.