Despite the buzz, it will be difficult to revamp a tax deduction that’s been in place for nearly a century. The housing industry’s powerful lobby is sure to fight any proposal that it believes would discourage home-buying, particularly given the weakness of the housing market. Both Congress and the White House would have to approve any change to the tax code, but they could be reluctant to take on such a controversial issue before the 2012 presidential election.
“REALTORS®, homebuilders, everybody who has a vested interest in preserving this, have a very strong voice on Capitol Hill,” said Guy Cecala, publisher of Inside Mortgage Finance. “They’ve done a pretty good job of keeping everybody’s hands off of it.”
The conversation about changing the mortgage deduction policy was sparked again this month, when the Obama administration released its plan for winding down the government-sponsored mortgage giants Fannie Mae and Freddie Mac. Though the report didn’t offer specifics on the mortgage-interest deduction, it did note that the deduction had encouraged investment in housing “over other sectors in the economy.”
The mortgage-interest deduction works like this: Say a home buyer makes $50,000 a year, and paid $5,000 last year in interest on his mortgage. If he claimed his mortgage-interest deduction, the IRS would tax only $45,000 of his income (or less if he claimed other deductions).
The IRS also lets people claim deductions on interest they pay on a second home or a home equity loan. The home mortgages must be $1 million or less, and the home equity loans must be $100,000 or less.
The mortgage-interest deduction is probably most helpful for people who bought their homes recently. That’s because when you first buy a home, a large portion of each monthly payment goes toward paying down the interest. As you live in your home longer, the portion of your monthly payment that goes toward interest will shrink, and the portion that goes toward principal will increase, at least in most traditional home loans. This will effect the home owners in Power Ranch Arizona or those looking for homes for sale in Power Ranch.
Some consumer groups such as the Greenlining Institute, a California-based group that pushed the banking industry to modify low-income borrowers’ mortgages, propose wiping out the deduction.
Instead, the government should give a yearly tax credit of up to $5,000 to moderate- and low-income families who buy mid-priced or low-priced homes, the consumer groups say. (A credit, unlike a deductible, would simply wipe out the first $5,000 that the family owed to the IRS). The Greenlining Institute and the National Asian American Coalition say this plan would add to the government’s tax coffers, while also giving tax breaks to the people who need them most.
The Obama administration’s proposed 2012 budget would leave the deduction in place, but places some limits on the deductions claimed by families making more than $250,000 a year.
The Office of Management and Budget (OMB), which helps the White House develop its budget, estimates that the mortgage-interest deduction cost the government $79 billion in forgone taxes in 2010. That could rise to as much as $144 billion in 2016, the OMB estimates. While some observers argue that the government should get rid of the deduction to help plug its budget gap, others say homeowners should be allowed to keep their money.
The president’s deficit commission advocates changing the tax deduction to a tax credit, similar to what the Greenlining Institute proposes. It would also cap eligible mortgages at $500,000 instead of $1 million, and eliminate any tax benefits for second homes and home equity loans.
After the deficit commission’s report was released in December, the real estate industry fired back. “Recent progress has been made in bringing stability to the housing market and any changes to the mortgage-interest deduction now or in the future could critically erode home prices and the value of homes by as much as 15 percent,” National Association of REALTORS® President Ron Phipps said in a release at the time.
He also said that in a recent NAR survey of almost 3,000 homeowners and renters, nearly three-fourths of the homeowners and two-thirds of the renters said the mortgage-interest deduction was “extremely” or “very” important.
Robert Pozen, chairman emeritus of MFS Investment Management, estimates the U.S. could save $15 billion a year if it got rid of the deductions for home equity loans and second homes, and decreased the eligible mortgages to $500,000. He doesn’t think the mortgage-interest deduction will disappear in the U.S. But he said there’s perhaps a 30% or 40% chance that one of the three proposals he advocates will be adopted. “Five years ago, I would have rated it at 1 percent,” Pozen said. “People are starting to come to grips with the budget problems.”
The purpose of the mortgage-interest deduction is to encourage people to buy homes, with the idea that homeowners take better care of their property, contribute more to their neighborhoods and can build wealth.
But some argue that the government shouldn’t subsidize home ownership. The government pushed home ownership hard in the 1990s and early 2000s, and some of the borrowers who got homes couldn’t really afford them. Most experts agree that this was one of the causes of the financial meltdown.
A study by Christian Hilber of the London School of Economics and Tracy Turner of Kansas State University found that in some parts of the U.S., the mortgage-interest deduction can actually discourage home ownership. In tightly regulated, land-scarce metro areas, the tax deduction can raise demand for homes but not supply, making it more expensive for people to buy houses, the study said. Pozen said the mortgage-interest deduction tends to disproportionately benefit families making $100,000 or more each year, largely because they tend to have the biggest houses and the biggest house payments. Middle- and lower-income homeowners tend to actually get a better deal by claiming the standard deduction instead of itemizing their deductions to claim the mortgage-interest deduction, Pozen and others said.
A study by Christian Hilber of the London School of Economics and Tracy Turner of Kansas State University found that in some parts of the U.S., the mortgage-interest deduction can actually discourage home ownership. In tightly regulated, land-scarce metro areas, the tax deduction can raise demand for homes but not supply, making it more expensive for people to buy houses, the study said. Pozen said the mortgage-interest deduction tends to disproportionately benefit families making $100,000 or more each year, largely because they tend to have the biggest houses and the biggest house payments. Middle- and lower-income homeowners tend to actually get a better deal by claiming the standard deduction instead of itemizing their deductions to claim the mortgage-interest deduction, Pozen and others said.
The standard deduction for most single adults is $5,700 this year, or $11,400 for married couples. So, all else being equal, the example homeowner mentioned above who pays $5,000 a year in mortgage interest would be better off claiming the standard deduction instead of the mortgage-interest deduction.
Regardless of how the laws are finally negotiated, purchasing a home in Power Ranch Arizona is a good buy. What you "might' give up in interest deductions will be off-set by the market prices that are equal to pricing in the year 2000. I also think that congress will have a tough time passing this bill because it will have a devastating impact on one of the largest sectors of our economy. If it does go through it will be for mere political purposes of ostensibly not favoring the "rich" in an effort to redistribute the wealth of our nation. Are you looking for homes for sale in Power Ranch. Power Ranch Arizona is a wonderful master planned community to raise a family or retire!
