Mortgage interest deduction focus of debt debate

San Francisco Chronicle ^ | 9/4/11 | Carolyn Lochhead, Chronicle Washington Bureau

[SmithL]

Washington -- Ending tax breaks for oil, corporate jets and hedge fund managers is nearly every Democrat's favorite way to reduce the federal debt. But one of the biggest tax breaks of all is heavily skewed to wealthy residents of San Francisco, San Jose and California's other upscale coastal cities.

It's the mortgage interest deduction, and its benefits are heavily concentrated in a handful of pricey cities, none of which votes Republican.

As the new super committee of Congress sets about finding another $1.5 trillion in deficit reduction by Thanksgiving, tax breaks of all kinds, including the interest deduction, are getting new scrutiny. Beloved by the public and the real estate industry, the deduction will cost the government more than $1 trillion over the next decade.

But few homeowners, even those claiming the deduction, know how skewed it is by region and by income. For young, affluent San Franciscans, it is tailor-made.

Just three metro areas - greater New York, Los Angeles and San Francisco - receive more than 75 percent of the subsidy, according to a 2004 study by economists Todd Sinai and Joseph Gyourko. Mortgaged homeowners in the San Francisco and San Jose region receive $4.6 billion a year from a tax break for what are known as McMansions, according to a study this year by John Burns Real Estate Consulting in Irvine.

The tax break is available to anyone who borrows up to $1 million for a mortgage - including for a vacation home - or takes as much as $100,000 in a home equity loan.

[silverleaf]

The deduction is the second-largest federal tax expenditure

Read more: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2011/09/03/MN101KRFD4.DTL#ixzz1X08s2zgY

There you go- the underlying philosophy that your money belongs to the government and any that it lets you keep, is an “expenditure” by the federal government

BTW- I doubt if any of those pricey houses pictured in the article even have mortgages

Mortgage interest deduction helps the middle and upper middle class. Let the “super committee” tell obama it is OK to suck away extra tens of thousands of income the middles and upper middlers are now using to pay for housing (and qualified for their loans by assuming) ... give it to the feds to waste....and watch what happens.

No mention in this article that the AMT already bites people in this income group and limits all deductions

[whitedog57]

The deduction is yet another attack on citizens. Look at the mass refi plan of the Adm.

http://confoundedinterest.wordpress.com

[BigBobber]

Just three metro areas - greater New York, Los Angeles and San Francisco - receive more than 75 percent of the subsidy, according to a 2004 study by economists

This study is woefully out of date. Home prices have tanked since 2003-4.

Everyone knows this, so I assume out-of-date reports are being used on purpose to push the statist agenda.

[Pearls Before Swine]

I can see an economic argument for not having the mortgage deduction in the first place, but eliminating it once it is in place is an entirely different matter. For one thing, it will depress real estate prices even further, because the early years of a mortgage are essentially all interest, and if it's not deductible, the house price will drop by approximately the percentage of the income presently shielded by the deduction.

What does that mean? Lenders--i.e., banks, Fannie/Freddie, holders of RBS securities such as insurance companies--will all take huge hits to their capital. And, who stands behind that? The taxpayer.

I would guess that, in keeping with the Obama war on success, any such change would occur for higher priced properties, or in the form of income-based phaseouts, in which case it wouldn't cover all homes, and would primarily amount to a stealth increase in marginal tax rates for the relatively better off.

[chris_bdba]

Ww lost our ability to deduct the first time it was cut(1989?) so this really means zero to those us us who live within our means.,....

[ladyvet]

Same here, could never use it.

[MontaniSemperLiberi]

From Dave Ramsey,

"It is wise to keep my home mortgage to get the tax deduction."

Let's do the math. If you have a home with a payment of $900, and the interest portion is $830 per month, you have paid around $10,000 in interest that year, which creates a tax deduction. If, instead, you have a debt-free home, you would in fact lose the tax deduction, so the myth says keep your home mortgaged because of tax advantages.

If you don't have a $10,000 tax deduction and you're in a 30% tax bracket, you will have to pay $3,000 in taxes on that $10,000. According to the math, we should send $10,000 in interest to the bank so we don't have to send $3,000 in taxes to the IRS. Personally, I think I will live debt-free and not make a $10,000 trade for $3,000.

[Pearls Before Swine]

Re post 8:

I’m not sure what your point is. If you have the means to buy a home as opposed to borrowing the money, it usually makes sense to do so. However, most homeowners don’t have that choice, as evidenced by how many homes have mortgages.

So, given that money is going to be borrowed by most people, it follows that making the cost of borrowing more expensive is going to hurt home values.

[rfp1234]

Another brilliant idea by liberal turkeys. Let’s wreck home prices
even more, they haven’t dropped fast enough.

[MontaniSemperLiberi]

Of course it’s going to hurt home values but not as much as you think.

There are a lot of people making bad wealth creating decisions because of that interest deduction. If we were to eliminate that incentive to be stupid with money, Americans would be much better off. For instance a lot of people who are not good with money made the decision to buy homes because of Fannie/Freddie guarantees and the interest deduction. Now that the bubble has popped, they’ve had what little they could save wiped out.

Negative cash flow predicated on building fake equity does not increase home values.

[MontaniSemperLiberi]

I think it’s high time we got home prices to their natural level. It’s beyond me why another housing bubble should be encouraged.

[Pearls Before Swine]

Of course it’s going to hurt home values but not as much as you think.

Just for the record, I think 10 to 15 percent if it's done across the board. If it is just done by lowering the exempt amount from $1mm to, say, $400K, there will be compression of prices--higher priced homes will be hurt some, lower priced homes might actually be helped as people will shift down in their purchases.

[MontaniSemperLiberi]

Okay. Let’s say it’s 15%. What you’re saying is that the government has inflated home prices 15% above their natural value with this deduction. Do you think that’s a good thing?

[Pearls Before Swine]

What you’re saying is that the government has inflated home prices 15% above their natural value with this deduction. Do you think that’s a good thing?

Of course not. In fact, I think that policies like CRA have inflated home prices a lot more than 15% from trend--look at any chart, like the Case Schiller index.

It would be better if it had never been done. But, we are where we are, and if you let the air out all at once, there will be consequences--some of which I've listed. If home prices drop 15% because of a sudden adjustment, in addition to the drop they've already experienced, there will be a lot more underwater banks and securities.

Now, if an adjustment policy were to take place over some longer period of time, like 8 to 10 years, the shock would be diminished, and I'd be willing to discuss the policy on its merits (which are actually substantial).

[madison10]

I can see phasing it out in oh, say 10 years, as many have already planned the deduction into their lives and budgets around the deduction. Once in place it’s not something that should be jerked out from under homeowners. The deduction is hardly just for the “wealthy.” Are they trying to catch up the remaining home owners that they didn’t grab through foreclosures?

[Glenn]

I barely meet the minimum requirement for deductibility as it is. If the government would agree to lower the 1040 minimum so I could still deduct charitable donations, state tax, local tax, et al, I could live with it. (Providing there is a quid pro quo to make it revenue neutral at implementation).

[AlanGreenSpam]

-—”There are a lot of people making bad wealth creating decisions because of that interest deduction. If we were to eliminate that incentive to be stupid with money, Americans would be much better off. “

Ah, a rational person here among a bunch of RINOS.

I can’t believe all the Freepers who go ballistic on “RINOS” yet when the Home Mort Deduction is up on the table for elimination, they’re squawking bloody murder.

Don’t you people get it that the Fed meddling with the markets and with people’s buying decisions is WRONG. The FED had deemed that “homeownership is good, therefore, we will subsidize one class of people over another.” Don’t you guys see this is the same kind of “social engineering” that President Obeyme Chewbacca does every day??

I have a hefty mortgage, but OUT OF PRINCIPLE, I’m all for eliminating/phasing out the deduction. That’s what having a fiduciary sense about the country means (I can divorce my own self-interests from my decision-making) and make ETHICAL choices.

All you people here whining about the potential for losing the deduction are allowing your personal self-interest to get in the way of evaluating the issue from a purely ethical standpoint.

[AlanGreenSpam]

Furthermore, getting the Fed out of the Home Mortgage Deduction business would seem to be compatible with both the Tea Party platform and the Libertarian platform: Less Fed Meddling in the affairs of private individual choices.

[chris_bdba]

AMEN! Like I said our interest has never been enough to deduct so this means nothing to me.I’ve always thought it was backwards....why should those who can afford a $300,000 home be able to while those of us who bought the under $100,000 not be able to.End it of all or let everyone have it.