Mortgage Interest Deduction And The Other Tax Eliminations

Mortgage Interest DeductionSince 1913, one of the benefits of owning a home, rather than renting, has been the mortgage interest deduction. As Congress negotiates new tax laws, the mortgage interest deduction may become a thing of the past.

For 99 years, the property taxes and mortgage interest we pay on personal residences have been deductible in the year in which they were paid. This amounts to a sizable deduction, thus home ownership has been one of the few remaining legal tax shelters. The United States is one of three remaining countries still allowing full mortgage interest deduction; The Netherlands and Switzerland also allow the deduction.

Currently, our law allows homeowners a mortgage interest deduction on balances up to $1 million. This includes a deduction on second homes, as well as on home equity loans, up to $100,000. The mortgage deduction significantly benefits wealthy families, in part because

• The wealthy tend to have higher mortgages and pay more interest
• The majority of low-to-middle-income Americans fails to itemize deductions on their 1040 tax returns: a requirement to reap homeowner tax benefits

According to the Office of Budget Management, mortgage interest deduction cost the American government more than $100 million every year; however, close to 80 percent of that amount is a subsidy for the wealthy. Incomes over $200,000 reap the benefits of this deduction. Simply capping the deduction on second homes would significantly reduce the national debt.

Mortgage Interest Deduction: Undermining a recovering market

The National Association of Home Builders agrees that the consequences of eliminating the mortgage interest deduction would devastate the housing market. Millions of middle-class homeowners who make less than $200,000 a year rely on the mortgage interest deduction. Tax reform would further depress home values, thus leaving millions of homeowners with a mortgage worth more than the home value.

Mortgage Interest Deduction: The Argument for Tax Reform

Congress argues, although the ability to deduct mortgage interest has always encouraged home ownership, buying a home is a personal commitment, and personal expenses are not government responsibility. Many say the ability to deduct mortgage interest has not been a significant motivator in the real estate industry. Do homeowners really base their decision to purchase a home on the deductibility of their interest payments? According to the Internal Revenue Service, large percentages of taxpayers do not itemize deductions, and therefore are not benefiting from the deduction of mortgage interest. The arguments are valid on each side of the fence; the side that benefits just depends on which side you stand on.

Mortgage Interest Deduction: The Tax Dings Keep Coming

The elimination of mortgage interest deduction is in the spotlight, yet very few are paying attention to the possibility of all the other real estate write-offs. Currently, homeowners can dodge taxation on home-sale gains every two years, but this benefit is also up for discussion. This would hit baby boomers hard since it allows this particular group to avoid federal taxes on their home-sale gains. Another group significantly affected would be homeowners currently negotiating loan modifications, short sales, and debt forgiveness. The Internal Revenue Service would treat debt cancellations and short sales as ordinary taxable income.

Tax reform is entirely plausible but at whose expense?

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