Tuesday, May 10, 2011

Should the Mortgage Interest Deduction Remain Intact?

The mortgage Interest Deduction for Federal Income Tax purposes has been the subject of concern for some time now as there are members of Congress that intend to try and repeal this favorite tax deduction for homeowners on Schedule A of the 1040.

Some of you might be wondering what this deduction is and how it got started. The deduction for Federal Income Tax Purposes started in 1913. Surprisingly, it was not started to be an entry way into middle class home ownership. It was started to simplify the record keeping for a nation of small time entrepreneurs. It was often a difficult thing to separate business expenses from personal expenses for the multitudes of homeowners that ran their business in their homes.

Initially, the deduction was used quite rarely since most people paid cash for their homes and did not carry a mortgage. Of course, that is hard to imagine today for those of us "baby boomers" and post "baby boomers".

According to Wikpedia "Under 26 U.S.C. § 163(h) of the Internal Revenue Code, the United States allows a home mortgage interest deduction, with several limitations. First, the taxpayer must elect to itemize deductions, and the total itemized deductions must exceed the standard deduction (otherwise, itemization would not reduce tax). Second, the deduction is limited to interest on debts secured by a principal residence or a second home. Third, interest is deductible on only the first $1 million of debt used for acquiring, constructing, or substantially improving the residence, or the first $100,000 of home equity debt regardless of the purpose or use of the loan."

The National Association of Realtors is heavily lobbying for the continuation of the MID which they claim is necessary for the national economic recovery as housing drives the national economy. (My earlier post on real estate notes that housing used to be 20% of GDP and is now 2.4% per Lisa Sturtevant, an Assistant research professor from George Mason University Ecomonics department.)

Ed Glaeser, a noted Harvard professor of Economics, contends that the MID is part of the "hidden welfare state", subsidizing wealthier individuals and corporations and driving people from urban areas. Ironically enough, he also asserts that in his research with another professor, that homeowners are "more engaged" citizens than renters.

No matter which side of the fence you are on, the stakes are high.

The National Association of Realtors predicts that housing prices will fall an immediate 15% if this deduction is eliminated. The average income tax bill will rise substantially for those homeowners with sizeable mortgages.

Some say a compromise on the issue would be to limit the size of the deduction to a certain amount (say $7,000-15,000) so the less affluent could keep their deduction and the affluent could still receive some tax incentive to be homeowners. This compromise is based on the assertion that the revenue brought in by this tax change would substantially aid in reducing the federal

What this assertion doesn't measure is the toll on the economy that will result with reduced disposable income per household.

We must carefully weigh all the pros and cons of this proposed change in the tax law if it makes it to the forefront of proposed legislation by Congress.

If you would like to make your real estate dream come true-- call me today, I treat every transaction as if it were my own.

Carla Brooks

PS All photos are courtesy of http:// www.freedigitalphotos.net

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