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San Carlos Real Estate December 2, 2010

Home Mortgage Interest Deduction Is On the Chopping Block (Again…)

by Chuck Gillooley

Sacrosanct, or Extinct?

The home mortgage interest deduction – the single greatest tax write-off for most Americans – is once again in the cross-hairs of budget-cutting lawmakers.  Chartered with curbing our runaway $1.3 trillion (yes, trillion) federal budget deficit, a special commission appointed by the President has thrust the single largest public tax break back into the spotlight again.    And while the current proposal that has been submitted by the Bowles-Simpson Commission to the Obama administration doesn’t completely eliminate the tax break for mortgage interest, it may as well have just that effect for many Californians, and other Americans in higher cost of living area.  Here’s why…

The proposal on the table reduces the upper limit of mortgages that qualify for the deduction to $500,000 or less, down from the current limit of $1M.  Furthermore, it completely eliminates the deduction for second homes, and home equity lines of credit and loans.   Since many Californians have principal loans over $500,000 and are carrying a second line on their home, this would be a huge hit.

Dagger to the Housing Market?

Opponents of this bill claim that eliminating the mortgage interest deduction will absolutely cripple an already weak real estate market in the United States.   Whether you agree with the degree of this assessment, one thing rings true — it will add a new wrinkle to the “rent vs buy” decision that many home buyers rationalize.    There are 2 main reasons why people decide to buy a house over renting:

  1. Capital preservation/growth (aka equity building).  Homes used to be simply a form of shelter.  Today, with average home prices rocketing upward over the past decade to nearly $1M, home ownership has unwittingly become an investment.     And much like a stock or bond, the value of the investment relies on the rate at which it appreciates over time.
  2. Tax Shelter.  Having the mortgage income deduction is much like owning a stock that pays a dividend.   In the case of home ownership, that “dividend” is in the form of a big tax break.

If you consider the fact that home prices today are relatively stagnant, and then throw in the possibility of eliminating the deduction on mortgage interest,  it makes renting a whole lot more attractive.

What Do You Think?

Do you think reducing or eliminating the home mortgage interest deduction is a smart idea to help reduce the budget deficit, or will it prove to be a poison dart to the housing market?  Do you think the administration will move forward with this recommendation, or is it just another pawn in the budget negotiation game as it has been used in years past.     Here’s an interesting article in MoneyWatch that looks at this issue from a different perspective:  Is Your Mortgage Deduction Doomed?

In the meantime, be sure to vote in the poll in the sidebar or leave a comment below.
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Comments 4
  • Home ownership needs to revert back to basic fact that it’s just shelter not an investment like rental property. Eliminating the tax deduction will force people to be in the habit of making wise financial choices.

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    • Dante, I would be interested to know if you are a renter or homeowner since, as a homeowner, I suspect your opinion to be in the tiny minority.

      Your proposal would essentially dismantle our entire financial system.

      What would you replace it with? Do you really believe that eliminating the concept of housing as an investment is the answer? If all our homes suddenly became basic shelter, do you not see a massive domino effect to businesses and economies all over the world?

      I think the solution to our housing woes is to perhaps go back to the concept that you actually have to save money for a down payment, have credit and employment documentation and if you are lacking in any of these areas, you are denied a mortgage or required to pay for mortgage insurance.

      It worked for many years this way until the creative financiers got jobs at the big banks and went wild (apparently some of those same people were trusted to review loan modification documents at Bank of America).

      We need to go back, it’s true, but only so far to when homeownership was earned and overseen by responsible institutions.The system may have broken, but should be and is being repaired.

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  • Every respected financial adviser draws a distinction between “buying a home” and “buying a house”. The latter is reserved for the category of people who have been parroted the concept of buying a house as an investment strategy.. A trip to Vanguard.com website or listening to Bob Brinker on KGO radio provides illuminating details.

    As far as tax deductions, it will painful to those unaccustomed to distinguishinging wants from needs. It would be a great learning lesson that finally Americans will learn to save again. By the way, You may be suprised to learn that I support the abolishment of Prop 13.

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  • Amen, Americans need to learn how to save again and live within a budget (HELLO all levels of government!!).

    And, I can only speak for my personal situation but my $15000 down payment back in 1998 has, 3 houses later and even in this market, turned into over $500,000 in equity in our current home. In addition to the tax deductions, this will add significantly to my retirement portfolio.

    We did not take out interest-only loans, borrow against the house and only made improvements when we could afford to pay for it.

    We did not buy more house than one of our incomes could afford (in case of a job interruption) and we have not run up credit cards so that we are trapped by the interest.

    I am no saint when it comes to enjoying nice cars, vacations, et al, but it is in the budget.

    I am familiar with Bob Brinker’s philosophy, but you can ask any senior sitting on a property on the peninsula and they will tell you that under $2000 in property taxes on a home worth over $1 Million is a bargain. Even at $20,000 annual property taxes when I retire, without a mortgage, that’s a deal I can live with.

    And if we ever need to sell, it is an added security blanket.

    That is long term security and that’s how it’s done.

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