Proposal to reduce mortgage deductions
You've heard it said that the third rail of the U.S. economy is Social Security and that no one in elected office with a pulse will touch it. Up until now the same was true for the mortgage tax deduction, but with the national debt increasing by the minute, some of those same politicians will do just about anything to get their hands on some extra cash.
On Dec. 1, while most of the country was getting caught up in pre-holiday planning and shopping, the president's debt commission released its 65-page report intended to be a blueprint for a reduction in our national debt. Among the recommendations in the commission's report is one to amend the current tax deduction for mortgage interest on homes.
Under the current IRS regulations, mortgage interest on homes is capped at a $1 million mortgage. The new proposal would reduce this cap to $500,000 and also restrict the deduction to primary residences only. There would also be an elimination of interest deductibility for home equity loans which are currently capped at $100,000.
The National Association of Realtors and other consumer groups have, of course, come out against instituting these changes contending that this would reduce the value of all homes by as much as 15 percent or the value of the stream of tax savings. For example, it is estimated that the present value of mortgage tax deductions on a $625,000 home to be worth more than $72,000 in today's dollars.
Take away the deduction and the house is now worth that much less. If this really happened it would be an enormous blow to the 60 percent of Americans who already own their homes, adding to the double digit home value declines during the past few years.
Homeowners currently are allowed to take an itemized deduction for the interest they pay on their home mortgages. With conventional loans, most of the payments in early years go to pay interest on the loan and only a fraction going to principal. Therefore, most home purchasers not only consider purchasing a home as a place to live but also consider that it is buying an asset that translates into a valuable tax deduction.
Under the current tax code, a family that pays a $3,000 mortgage payment each month likely will get approximately a $2,300 per month deduction in the early years of owning the home based on its tax bracket. Obviously, this is the reason the debt commission recommended removing this benefit.
Supporters of the mortgage tax deduction provision, which started in 1913, contend that it has allowed millions of Americans to afford homes. Conversely, the detractors say the deduction led homeowners to overleverage by buying bigger homes that they wouldn't otherwise be able to afford.
On an island like Anna Maria, eliminating the mortgage tax deduction would be even worse than in more conventional locations. Since we attract a large percentage of second home and investment homeowners, and where it has not been uncommon for property values to be high enough to require over $500,000 mortgages, it would only set our real estate market back – just when it is in a full recovery.
Chances are the mortgage tax exemption third rail will not go on fire and homeowners and the real estate market will continue to benefit. But just in case, keep an eye open when Congress goes back in session and starts getting serious about improving its income stream and unimproving yours.