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:
- 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.
- 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?
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