Seems like good news for the housing market. Our government cannot stop going around in circle. More people will default and more people will need bailout?
Mortgage deduction is going to be chopped?
By bubblesitter Follow Thu, 28 Jul 2011, 11:20am 5,180 views 70 comments
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they should, but i dont know if they will. the costs are socialized to the society, but profits are privatized by NAR and the likes. I would think NAR would lobby and fight tooth and nail to keep this hand out going.
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are they talking about immediately eliminating it entirely, or immediately limiting it, or some 'schedule' of phasing it out? I'm just trying to figure-out how quickly it would impact home sale-prices.
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bsmith says
Neither. The deduction is not going anywhere.
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46 male
Menlo Park, CA
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It could just be limited to some reasonable amount, like the national median house price of $250K.
There is zero public benefit to subsidizing larger debts than that anyway. It's a pure transfer of wealth from the poor to the rich.
It's especially galling that people in the Midwest are currently forced to subsidize huge debts in California.
And if you believe that increasing ownership will improve neighborhoods, you want to target bad neighborhoods, where the houses are cheap. Good neighborhoods don't need any help. They never did.
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The national median price is irrelevant. Go find me a median priced house in the Bay Area or NYC.
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46 male
Menlo Park, CA
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Exactly! The median price around here is insane.
So why are we making poor people elsewhere subsidize large debts around here?
If we stopped that, then prices around here would be lower, and you'd get to buy a house cheaper. You would benefit hugely from that lower price.
And all those poor people would not see their tax dollars flowing to pay for debt for the rich, which just benefits banks anyway.
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The only problem with a price cap though is what you buy in some areas you cannot get in others.
$150k can get a decent place in Phoenix...it can't in Boston.
It runs contradictory to public housing to subsidize higher ended homes..
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46 male
Menlo Park, CA
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mdovell says
Not a problem!
High-end areas should not get subsidies. At all. Ever.
Ending subsidies will help make those high-end area more affordable, via lower prices.
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Patrick says
I much agree with that. When people buy something of luxury, subsidizing the price is the wrong thing to do. It's an appendage of status, high price ticket is the whole point of it being luxury. Poor shouldn't be forced to pay for some snob to live in some place he thinks is luxury.
And upsetting is that the banking/NAR cartell wins if this stays around. This artifically makes housing expensive, so now most people spend most of their income into unproductive housing market. At the end of that they have no money left to spend on real productive ventures. So small businesses now suffer because their potential clients have nothing left at the end of the month to spend on. Very upsetting one sided social engineering. I wonder if it will end before or after we are all poor, broke and are on government hand out because only the too big to fail are allowed to make it and be bailed out.
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EncinoMan says
The former Cali Gov, Gray "Red" Davis, pointed out a few years ago that neither Hollywood nor Silicon Valley are the biggest industries in CA. It was the Real Estate industry that topped
number 1. And he was all for keeping REI afloat.
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Arlington, TX
bob2356 says
A colleague at work rents to family for cash.
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Scottsdale, AZ
robertoaribas's website
As a landlord, you can be taxed on either A. actual rent received, or B. fair market value. Claim too little on a property and you are inviting an IRS audit, the last thing any landlord with a complex return wants. Even turbotax has a "rental check" to see if your rent is within the norms for the property and zip.
Its all good though, this is par for the Patrick forums. Those who know nothing, fell free to pontificate endlessly.
AND as a last point, landlords don't get the MID [mortgage interest deduction] that you are speaking of. Interest from a rental property is listed on the expense side of the ledger, same as every other property expense necessary to generate the income or rent. Same as every other business in fact, a car dealer counts interest on his buildings and inventory as an expense.
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I hope this happens as it will quickly drive down home prices back to reality!
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The mortage deduction is not going anywhere people. If they can't get rid of private jet deductions, how are they going to get rid of the mortage deduction?
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Arlington, TX
HousingWatcher says
Originally, it was not just mortgage interest that you could deduct from your income tax, it was all interest.
I think it was the late 80's when that was phased out as that was the same time they got rid of income averaging which I was eager to take advantage of just having graduated from college and gotten my first real job.
MID does not benefit the large number of senior citizens that own their houses out right. I can see it being phased in over a 3-4 year period to rope in those seniors close to retirement age.
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robertoaribas's website
I'd love to see the MID die.
1. it encourages debt.
2. MOST people who think they are going to get it, get no benefit or a very small benefit from it. I've seen posters here on patrick claim it gets rid of 1/3 of the interest on a 200K loan. WRONG, 10K or so in interest will for many people, be less than the standard deduction anyway.
3. Agents lie about it. When I bough my first place, 20 years ago for $50K, the agent told me I'd get a tax deduction. This was before the internet, so I really didn't know. Of course, with that small of a loan, it made no difference at all.
4. 80% of the break is taken by very wealthy people, who naturally don't need. Talk about a tax waste. Lets throw it in, along with the elimination of the BUSH BS tax cuts, to reduce deficits, instead of the pure spending cuts path we are currently on.
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Remove it by itself. It's an inflationary mechanism anyway.
However, the pure spending cuts are exactly what is needed. Government spending has doubled in 10 years. The Debt has increased 140% in 10 years. How can you honestly sit here and rip the MID because it creates debt when government spending does exactly the same thing?
If MID is eliminated it will be because the government wants more of the people's capital. It won't be eliminated because it's an inflationary catalyst that serves the capitalization of the banking sector.
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robertoaribas says
If I may add to that....
4. It benefits only the banks who collect the interest, and the agents who use it as a sales pitch
5. It's a huge drain on our tax revenue
6. It's unfair to those who pay rent, own outright, and aren't leveraged to the hilt
7. It's a form of social engineering. The narrative of "home ownership is good for America" has increasingly pounded into the public's and Congress' heads.
Disregarding the reality (such as) the economic, social, and non-MID-county ownership rates, the MID has become almost as much of an entitlement as Social Security. People actually believe they deserve it. Many claim they cannot live without it. THAT is why it needs to go. It's an impetus for over-consumption in the housing market, which drives up costs and makes the benefit a net-zero for those who "earn" their MID.
wtfcapinv says
I don't care what their official reason is; they could claim it needs to end because we're building a ladder to the moon, fine by me.
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vain says
I agree. And ax the tax credits as well.
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The trouble with axing tax credits is there are many that give to organizations because of that.
Non profits usually pick up with services that the government does not offer and that the private industry will not serve. If they get cut further it might dump the services.
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mdovell says
I've thought about this quite a bit and I know this will sound cold, but there's no reason that our govt should be bribing people to make charitable donations. That should be done out of sincere charity, not a tax loop game. I see this as yet another way to use our tax code to socially engineer the masses, and to make ourselves feel more generous as a nation than we really are. Just like home ownership should merit the decision to buy rather than a bribe, so too should the merits of a particular charity be enough for one to donate. Also, since not all charities are equal, this allows people to funnel their money through some less-than-honorable charitable accounts for self-serving purposes. That ends up costing us tax revenue as a whole, which those who don't get the deductions end up paying for. Further, on this point, why should my tax dollars indirectly go to a church or mosque that I disagree with? Why should someone get a tax break for donating to the Westboro Baptist Church?
In principle, charitable donations should not be made tax-deductible.
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46 male
Menlo Park, CA
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I disagree. New buyers would get a lower price on a house if there were no MID. So California income tax payers who buy a new house would win by paying a lower price. There would simply be less debt out there to push up prices.
But yes, for current California owners, they would no longer get that deduction, yet would not benefit from the lower price like new buyers would. So they would lose -- except of course they could save even more by upgrading to a bigger house at the new, lower prices. The savings on their new house might be larger than the loss on their current house.
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Oakland, CA
the MID doesn't factor in when qualifying for a mortgage. so I doubt removing it would effect housing prices that much.
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toothfairy says
Its impact is indirectly modeled in the risk factors. Removing the MID would cause more defaults, which would in turn increase the lending standards or DTI ratios. Not that this is a bad thing, but it will make a difference.
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SJ says
I hope so. I would also expect them to grandfather in anyone who already has a mortgage though.
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huh? why would that be? because they've been given this benefit and they're not entitled to it?
I hope so. I would also expect them to grandfather in anyone who already has a mortgage though.
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zzyzzx says
That actually doesn't make a lot of sense and just creates more distortions and preferences in the tax code.
What is more likely is a phaseout of sorts. This was done in reverse for the itemized deduction phaseout that we used to have.
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ih8alameda2 says
Well, because most people calculate their TAX deduction for their home when deciding how much home they can afford. Especially in the $400K-600K range for earners in the $100-200K income range.
Scrapping that deduction would mean these people... (not rich by any stretch.. just middle class in big cities). Will be told they won't get $5K-10K in cash come tax time that they probably planned for...
How do you think that will effect the economy? Huge crash in home prices another 20% atleast, more unemployment, more foreclosures... all around a guarantee of a deep, deep depression unlike anytime in history....
One that we might not recover from in our lifetimes.
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Los Angeles, CA
Los Angeles Renter says
So end of the world if the mortgage interest deduction is eliminated?
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Michael D says
That's what NAr want us to believe, yes.
If the MID ended tomorrow, lots of homeowners would be fucked. While I don't feel sorry for them since it's DUMB to base your finances on an unjustifiable bribe, I am pretty sure they would be grandfathered in. If not, maybe they actually can make ends meet; get rid of that fucking benz or don't go on vacation.
LA renter is wrong though. The MID vastly helps the UPPER class, that's where the "lost" revenue is disproportionally going.
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Scottsdale, AZ
robertoaribas's website
I don't think the end of the MID would be the end of housing. At the right price to rent, buying makes sense without any tax bribe at all, and only in really expensive markets is the MID significant in any way.
Also, I'm quite sure if it is killed, it will be phased out. Those who already own would likely be grandfathered in, and I doubt it would be completely elliminated, but rather phased out as either income or loan size grew beyond a certain level.
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klarek says
or the value of a simple home.
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C Boy says
I paid my landlord in cash every month for six years. To pay him by bank transfer would have incurred bank transfer fees every month; why waste $2 a month when I can go downstairs and hand him the money?
Tangential question (and off topic, MID-wise): let's say you own your first home and need a bigger one (you have kids, say), so you rent something while renting out your home to someone else. If the person renting your home deposits money directly to your new landlord, does that count as taxable income for you in your state?
What if you buy a second home with a mortgage and have the renter of your first home make the mortgage payments on your second one?
How about if you paid the utilities for the person renting your home (so the bills are still in your name)? Do you still "live" at your first home in that case?
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klarek says
I understand your argument. But..
I'm in Mass. After the state government the 2nd largest provider of social services is the Catholic church. When the priest scandals happened around 8 or so years ago it caused settlements and ultimately diocese started to close/merge. Schools closed causing students to go to public which elevated classroom sizes which meant more teachers would have to be hired. Less homeless shelters, less food banks etc.
Before government was large (post FDR) services were mostly religious based. Since various non profits try to fill the gap when they hurt it can add to higher demand on social services which can equate with higher taxes.
There are different levels of non profits. A YMCA in a urban area probably serves more people than some historical society preserving rare plants in vermont. Heck I've heard the NFL is non profit (all the money is made by the teams).
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mdovell says
That's a very poor argument. The amount that the government effectively pays to charitable organizations by having non-profit deductions could be better spent by the government in providing those services.
Most true charities (as opposed to nominal non-profits) are quite inefficient, and in many cases very little of the money coming in goes towards helping people. The government could instead directly provide this money for those causes and eliminate a middle man.
As for other nominal non-profits (e.g. universities and other things that aren't true charities), they should have to balance their budgets on their own accord, since they are largely run as businesses and have endowments.
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Michinaga says
Great for you, but very few people live on the same property as the landlord. You need a different bank if they are charging for bill pay. So if your landlord moves to Lake Tahoe your plan is what?
Michinaga says
These are all questions between you, your lawyer, your accountant, and the IRS. Since these are all things that are deceptive, at least on the face of it, then what the IRS decides your intent was will determine what happens if you are caught. If the IRS decides a transaction exists only to avoid taxes they will come down hard. Sometimes very hard if you really piss them off, like criminal charges hard.
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Los Angeles Renter says
1) Your argument is that people can't adjust their allowances on their W-4 properly to compensate? That is a very weak argument. If people are regularly (i.e. year after year) getting $5-10K in tax refunds, they should learn how to fill out the W-4 properly. I wouldn't trust them to have calculated the tax benefits of home ownership correctly if they can't get their W-4 right, so this undercuts your argument.
2) Why must a tax preference be permanent? Any tax deduction or credit can change over time. That argument is not sympathetic and can be accounted for by a phaseout.
3) The range you gave isn't always accurate. If you make $100K as married filing jointly, we are probably talking about the 25% bracket (unless you have huge items that put your AGI below 70K or so bumping you into 15%). If you make $200K, then you are talking about the 28% bracket.
If you live in Texas (no state income tax), then your net benefit (which is an interest rate deduction, effectively) is only $2250 at $100K with a $400K house (assuming the loan is interest only!) because 11K of that would be covered by a standard deduction anyway, and similarly it would be $5320 for $200K/$600K.
If you live in California (9.55% marginal bracket), then it might be in the range you're saying, since you might be paying a larger amount in state taxes, although the range would be $7,510-$11,265 for federal and state taxes, again assuming an interest only loan.
However, if the loan is not interest only and instead amortizing (as most loans do), then the amount of the benefit decreases over time. Someone who is 15 years in isn't getting the benefit you're suggesting since they aren't paying as much interest as you're saying.
For what klarek said: let's say $800K house and 33% bracket and in California, which would give more than $17K on an interest only basis. Removing the deduction would disproportionately affect higher income people, which is probably a good thing, since they may own more expensive houses.
The middle class in big cities is sort of a red herring. The median income in the city of San Francisco is still around $70K. If you make $200K, you are still exceedingly well off.
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Arlington, TX
Texans are allowed to deduct the State sales tax paid for the year from their Federal taxes(whether or not you own or rent). You may either use a standard amount or if you bought a large ticket item (car) actual amount paid.
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Sunnyvale, CA
I think the mortgage deduction will stay because
1. It lets banks write bigger loans for higher origination fees and servicing charges to consumers who base maximum home purchase price on what it does to their cash flow.
2. The National Association of Realtors members can sell more homes (to buyers with an emotional attachment to the tax deduction they don't get as renters) and more expensive homes with bigger expensive commissions with the deduction in place. As of 2005 their PAC was the largest in the country and #3 donor to political campaigns.
Being nice to current mortgagees and bad for future buyers is just a side effect of funneling money which would be paid as taxes into the banking and real-estate industries and getting agents' a bigger share of the housing buy.
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C Boy says
Sure, but that's not nearly as much unless you're a big consumer. If you're one of the people who buys a new car frequently enough that this makes a difference, then you can probably afford losing the deduction too. Even if you made $4000/month in consumer spending (which implies you earn quite a bit, since that would exclude rent and utilities, various services, and any number of other things that aren't subject to sales tax), with the highest possible sales tax of 8.25%, that only totals around $4000/year in sales tax to deduct. And Texas excludes groceries and medicine from sales tax, has sales tax holidays for clothes items under $100, and cars are taxed at 6.25% only (no local/county). It doesn't boost things into the stated range unless you are very well off.
drew_eckhardt says
Yes, it's a handout largely to banksters and realtors. For everyone else, housing prices just rise to compensate. They have better lobbyists than us other folk.