The tax subsidies inflate the purchase price of homes. This primarily benefits mortgage lenders and realtors, whose income based on a percentage (of the mortgage and the purchase price respectively) and who therefore have a vested interest in higher prices. Remove the subsidies and purchase prices will decline, benefitting buyers.
But you have to be able to connect the dots to understand this. Few people will stop to think it through, and given the politics involved, the media will actively conspire against informing the public.
Now: a complication. The prospect of lowering purchase prices will scare current homeowners, for whom their home equity is likely a big part of net worth. The House bill grandfathered deductibility as a partial protection. As a practical matter, the political question will be whether the downward pressure on housing prices affects nominal prices. If it takes the form of housing prices rising more slowly than they would otherwise, existing equity would not be affected and the change would not be resented. If housing prices actually fell, there would likely be a reaction. This may very well vary from place to place.
But either way, this is a transitional issue. There is no public purpose served by artificially inflating housing prices to enrich realtors and mortgage lenders. We have a policy induced bubble in housing prices. The bubble should be eliminated.
I have strong memories about the changes brought on by Reagan’s 1986 act. It initially devastated the investment real estate market and hurt countless investor’s by eliminating deductions that they were counting on. Many bankruptcies, foreclosures followed. Even today I have clients dealing with the fallout.
However, I see that in the long-term it has created a healthier environment for real estate. The old environment was based on artificial values created by tax benefits and one that has no real economic value.
The same analogy is true for residential real estate when people are buying and valuing based on tax benefits rather than true economics.
Best post on the thread.
“There is no public purpose served by artificially inflating housing prices to enrich realtors and mortgage lenders. We have a policy induced bubble in housing prices. The bubble should be eliminated. “
Spoken like Central Planner.
Here is what they do in Canada:
Canadian federal income tax does not allow a deduction from taxable income for interest on loans secured by the taxpayer’s personal residence, but homes used in businesses as a landlord who owns a rental residential property can deduct interest as any other reasonable business expense. The difference being the deduction is allowed only when the property is not used for the taxpayer’s personal use but is used as in any other type of business.[2] However, there may be additional exclusions for passive activity losses.
An indirect method, known as the Smith Manoeuvre, for making interest on mortgage for personal residence tax deductible in Canada is through an asset swap, whereby the homebuyer sells his existing investments, purchases a house in full or in part by the sale, gets a mortgage on the house, and finally, buys back his investments with the money from the mortgage.[3] The Supreme Court of Canada has ruled in 2001 in the Singleton v. Canada case[4] that transactions in the asset swap are to be regarded as distinct, thus rendering the interest on home mortgage acquired as part of the asset swap tax deductible.
The home ownership rate in Canada was about the same as in the United States in 2008[5] despite the difference in tax policy.
So you need other assets equal to the cost of a house in order to get the deduction.
Thanks for the reality check.
The beneficiaries of most of these current tax breaks (mortgage interest, state and local taxes, education expenses) are mostly the rich, who live in McMansions in high tax blue states where thy send their kids to Ivy League colleges.
If Middle Class taxpayers in their humble homes and kids in state colleges actually looked at how little they benefit from these deductions, or realized that most claim a standard deduction rather than itemize, there wouldn’t be this wailing about losing their deductions.
And yes, like subsidies do drive up the price of big ticket items like college tuition and home prices, and hide the spendthrift policies of high SALT states like New York and California.
And the rich don’t pay income taxes. They hide their income in dividends, stock options, corporation tax rules, overseas investments, phony loans. Yet they get all these deductions weighted in their benefit.
Wait till Joe the Plumber finds out that his federal taxes pay one third of the housing costs of Warren Buffet and Hillary Clinton.
My thoughts on this parallel yours. I would add insurance companies in there as well.
Before Washington is done, I bet we all incorporate ourselves to preserve home ownership, health insurance and retirement planning as costs of doing business.