Mortgage interest deduction not 'welfare'
Welfare is generally thought of as aid for those in need. Usually this aid takes the form of cash, vouchers, food or food stamps or some other type of charity contribution distributed as welfare for the needy. However, the term welfare is starting to take on a new meaning in our dynamic financial environment.
After the financial crash when the United States government bailed out Wall Street banks, the expression corporate welfare started circulating. As costly and distasteful as this bailout may have been to many Americans, the average homeowner would never consider that they are also receiving government welfare in the form of a home mortgage interest tax deduction. But there are government officials who believe that this type of tax incentive does subsidize some homeowners at the expense of others.
In 1913, tax interest deductions were instituted for both individuals and businesses. At that time, most people who purchased homes paid in cash and did not seek financing, and very few used any form of credit. As we know, with the advent of credit cards and home financing, the interest deduction for itemized tax returns became a huge incentive in doing business and purchasing homes. After the Tax Reform Act of 1986, the ability to deduct interest on personal loans and credit cards was eliminated leaving only the interest on home mortgages left.
Currently taxpayers who finance their principal residence, and in most cases their second home, are allowed to deduct the interest on their annual itemized tax returns. Homeownership also has the benefit of excluding individuals from capital gains on the sale of their primary residence within certain guidelines.
This important tax benefit, however, is starting to get challenged. Some in government are calling for radical changes to the tax code particularly as it relates to higher income and second home homeowners as a way to generate additional tax revenue.
As a response to this, in January, a bipartisan resolution was introduced to the House of Representatives affirming the value and importance of the mortgage interest deduction. The resolution, H. Res. 25, states in part "Expressing the sense of the Congress that the current federal income tax deduction for interest paid on debt secured by a first or second home should not be further restricted." The resolution asserts that homeownership promotes social and economic benefits as well as promoting security and stability.
As you can imagine, the National Association of Realtors strongly opposes eliminating the mortgage interest deduction. They state that housing is the engine that drives the economy and to even consider reducing the tax benefits of homeownership could endanger property values as much as 15 percent, as well as severely damaging any recovery in the real estate market.
Since, as stated by the House of Representatives, the national homeownership rate for the third quarter of 2010 was 66.7 percent, any change in the tax code in this area would affect the majority of Americans. And although it's unlikely this vital deduction will be wiped out completely, modifications to the tax law will be attempted based on income levels and more importantly second home status.
On Anna Maria and indeed in a good percentage of the Florida real estate market where second homes are plentiful, any change to the tax code affecting mortgage interest deductibility would be a terrible blow to recovery and going forward
It's crucial during this time of economic instability to keep a close eye on what's going on in Washington. Eliminating or reducing the benefits of the mortgage interest deduction would have a direct detrimental affect on all Americans. Don't let anyone convince you that your mortgage interest deduction constitutes welfare. Now is the time to put your congressional representative's number on speed dial.