More On The Mortgage Interest Deduction
As pressure mounts on the Washington D.C. crowd to come up with spending cuts, the mortgage interest deduction (aka MID) is sure to become a target.
A recent article on DSNews.com contains some interesting, questionable comments.
Seth Hanlon, Director of Fiscal Policy for HUD, says the MID should “be looked at through the prism of a spending program.”
Huh?
Since when does the mortgage interest deduction have anything to do with spending?
Then, there was the comment by Dean Stansel, Adjunct Fellow For The Reason Foundation (how do you get one of these jobs, anyway?) who said “75 percent of taxpayers don’t benefit from this at all”
Stansel went on to say that “the MID benefits those with higher incomes”.
hmmm . . . . . sounds like it benefits those who buy homes to live in with their families.
Tinkering with the mortgage interest is a thinly-veiled way to raise revenue at the expense of an already-fragile real estate market.
August 18th, 2011 Posted in Inside Real Estate
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4 Responses to “More On The Mortgage Interest Deduction”
By JR on Aug 18, 2011
Good analysis of this issue here
Bottom line is the Mort tax ded. simply inflates prices (less affordable). It is a market distortion that only benefits groups that like high prices… current people who overpayed (older generations) and commisioned agents who get bigger bites. It destroys the poor, the modestly leveraged and the young by simply inflating prices.
http://firsttuesdayjournal.com/the-home-mortgage-tax-deduction-inducing-debt-and-stifling-mobility/
and
http://firsttuesdayjournal.com/give-me-homeownership-or-give-me-death/?source=patrick.net
By Chris G. on Aug 18, 2011
Let’s put some real numbers on this. Good excuse to stay current with the financial calculator.
Consider a married couple w/ 2 kids making $75K/yr, buying a home for $250K, putting 10% down, and financing the remainder at 4.5%. (If these numbers aren’t realistic, please provide more realistic ones and I’ll re-do the calcs.)
Adjusted Gross Income before:
$75K- $11,400 standard deduction – (4x $3650 personal exemptions) =$49,000
Federal tax due = $8,430.25
Value of the MID: $0
Huh?
Year 1 total interest paid: $10,050.73 (Will be less in future years.)
Since this is less than the standard deduction, unless the family has miscellaneous deductions that exceed ~$1300, the MID is of **no value**. And even with $1300 in misc deductions, it’s a breakeven. So for this family, the MID isn’t worth much.
Bottom line:
1. I agree the MID benefits purchasers of higher-priced homes.
2. The effect of MID repeal to most home prices will be less than feared.
3. After major spending reduction, it seems reasonable to consider MID repeal…certainly on income properties…why should the gov’t subsidize real estate investments?
4. I believe the MID’s days are numbered…look for a gradual phase-out, from the current $1M to maybe $500K, and on down.
5. I believe once the MID goes away, prices won’t be *dramatically* affected.
And some lagniappe…let’s consider a $300K home, 10% down, with Jimmy-Carter-era mortgage rates…Feb 1982, 17.6%…
Payment (P&I)is: $3,981.07. (would be $1,289.02 at 4%).
First-year interest paid is: $47,498!!!
Value of the MID is now ($47,498-$11,400)*.25= ~$9K.
So the house would have to sell for ~$290K, vice $300K, if there were no MID.
Big takeaway here is we need to fear interest rates and inflation a heck of a lot more than MID repeal.
Thoughts?
By philhoov on Aug 18, 2011
All good points.
I expect that the MID will be pared down as a way to generate revenue (increase taxes).
By philhoov on Aug 18, 2011
Good input ~ thanks for your comment!