patrick.net

The way I see it, was the banks colluded with the government. The banks did not want to repo the toys but thought no one would ever dump their home. So … let the populace tie their car loan on their home. In this fashion the bank will not have to worry about a car repo again. After all they will never give up their home. Yeah.. After all, why would a bank encourage a vacation, a car, a jet ski on a home loan and then the Gov accept the interest deductibility?

Can you site a link to that policy change? As I understand it, mortgage interest is only deductible if the money was spent on the purchase or improvement of the house. Now there are some loopholes for RVs and boats that can't be considered "homes" as long as they have a toilet and you can therefor deduct the interest.

grywlfbg says

Can you site a link to that policy change? As I understand it, mortgage interest is only deductible if the money was spent on the purchase or improvement of the house. Now there are some loopholes for RVs and boats that can’t be considered “homes” as long as they have a toilet and you can therefor deduct the interest.

See, that's what I thought - I understood all this 'toy buying' on HELOC to be illegal or at least against the IRS rules. I don't know that for a fact though.

Off the top of my head, I can' t. But I do remember when the change took place. In the mid 80’s (1984-1986) bank lots were full of cars, boats, ect that had been repossessed. Then in ??? 1988 the change occurred. Interest from general loans were disallowed a tax deduction. Things may have changed due to the current restructuring of loan criteria but prior to this current mess, if I had the equity in my home, I can borrow that money and basically go to Vegas and blow it. The interest on that loan is tax deductable.

tepid says

if I had the equity in my home, I can borrow that money and basically go to Vegas and blow it. The interest on that loan is tax deductable.

Correct. It is not what you buy with the loan proceeds, but what the loan is secured by. The loan must be secured by the home to have the interest tax deductable.

Well, we could all do what the rich people do: Incorporate and then write off the whole f***king thing!

Lots of misinformation here. The rule is easy, but not that easy. See page 2 of http://www.irs.gov/pub/irs-pdf/p936.pdf

A good reason why all borrowing against so called “home equity” should be banned

Agreed. Except that I can see it in the event of a major home repair/catastrophe...as long as it goes back into the place, (minus additions) then it doesn't seem as egregious to me.

zetabeos1 says

A good reason why all borrowing against so called “home equity” should be banned

Yes, only original purchase money should be secured by the house. Anything else should be considered an unacceptable threat to a citizen's major asset. That is, if we want to push true homeownership, which in reality is a paid off home.

"Reverse Mortgages" are a similar threat.

The mortgage interest deduction was allowed because Reagan compromised. He originally wanted what would have been a simplified progressive tax code with no deductions.

His plan was to radically lower tax rates but at the same time radically reduce deductions -- thus keeping the government revenue neutral (anyone who claims that Reagan actually lowered taxes is full of shit -- the average person wound up with pretty much the same take home pay).

The objective (and in many ways, this was successful) of Reagan's policy was to get people to pay the taxes that they owed. Fraud was rampant, and band aid fixes like AMT weren't cutting it.

The secondary objective was to get government out of the business of influencing social behavior. The tax code is as complex as it is because the government really wants to make sure that you're following the behavior that they want. If you buy the right things and put your money in the right places, it's quite possible to pay virtually no federal income tax at all.

Kevin
(The secondary objective was to get government out of the business of influencing social behavior. )

When the gov would only approve interest tax deduction as it passed through your home, were they not influencing behavior. Basically guiding a person to do that very thing? Remember interest was deductible on your cars, boats, ect. Then with gov change…..interest was only deductible if it went through a home loan.

I really think the change was a method to keep people from defaulting on their toys. Ie… save the banks from losses. At one time in this country it was unthinkable to drop your home in foreclosure. Now people are dropping their homes as easily as they would an upside down loan of any type.

tepid says

When the gov would only approve interest tax deduction as it passed through your home, were they not influencing behavior. Basically guiding a person to do that very thing? Remember interest was deductible on your cars, boats, ect. Then with gov change…..interest was only deductible if it went through a home loan.

I don't think you read what I wrote correctly. Reagan wanted the government OUT of the business of influencing behavior, but he caved in on the mortgage interest deduction (among others) because it was more important to him to get the legislation passed than to be idealistically pure.

How can you say he cut taxes for most people, when it was under his watch payroll taxes were doubled?

I agree we should have a flat tax, only it should be a flat tax on land value rather than income or sales. There is no way to avoid it, the bookkeeping is easy by comparison with other taxes, and it's extremely fair.

http://en.wikipedia.org/wiki/Land_value_tax

HeadSet says

zetabeos1 says

A good reason why all borrowing against so called “home equity” should be banned

Yes, only original purchase money should be secured by the house. Anything else should be considered an unacceptable threat to a citizen’s major asset. That is, if we want to push true homeownership, which in reality is a paid off home.
“Reverse Mortgages” are a similar threat.

There would have to be exceptions - like if the home needed a new roof & the one they put on (& borrowed against for it) greatly increased the value of the home. At the very least it would preserve the value of the home.

No big deal for a lot of us. Our standard deduction is more than the mortgage interest deduction. Probably because we bought a house we can afford.

the mortgage interest deduction allows one to use the real property tax deduction - in New Jersey (I read somewhere that Jersey has the highest taxes) they can be thousands of dollars each month, easy).

A lot of people during the 1970s went crazy buying junk because we came off the gold standard, and the arabs grew a pair, and women started getting a check. Different times.

I agree with a flat tax, as long as that includes corporations. The average corporate income tax is less than 6%, which is less than 1/2 what it was in 1980 or thereabouts. How about 15% after the first 50k?

elliemae says

the mortgage interest deduction allows one to use the real property tax deduction

Are you saying that itemizing mortgage interest on Schedule A allows one to deduct the property tax on Schedule A?

Note that the IRS changed the rule last year so that you can deduct property tax even if you take the standard deduction (in fact, you add it to the standard deduction). This makes it even better for those with low/no mortgages.

zetabeos1 says

A good reason why all borrowing against so called “home equity” should be banned.

In a perfect world I'm for a ~12% tax on every dollar of income no matter the source - no deductions of any kind. However, since I live in the real world, I'll agree w/ some others (Austin, Ellie). As long as all of the money goes into the house as improvements/additions I don't have a problem w/ the interest being deductible. These people who bought cars and vacations? The IRS should show up and beat them.

chrisborden

You have hit the nail on the head. This is exactly what I was talking about. I think the banks asked the gov to make the "deductibility" change because they thought a person would only allow foreclosure at the very last resort.... but a person would dump a car or boat as soon as times got tough. Jingle mail is what they deserve.

I toured my first open house in a while this past weekend. It was a 2/1 (not quite 1,000 sq.ft) that sold for ~$220k in Oct. 1997 and ~$620k in Jan. 2007 (the seller should get an award for timing the peak). Currently asking $599k. This is East Bay prime, and I certainly don't expect to hit the 1997 price (I'll settle for less than half million, though I think $300k is a possibility when the dust has cleared). This home actually provides a nice window into the last downturn (sold for $177k Aug. 1989 and then sold again for $178k July 1994).

knewbetter says

How can you say he cut taxes for most people, when it was under his watch payroll taxes were doubled?

I didn't. Most people wound up with taxes that were flat. What he did was cut the federal income tax rate, and he papered over those cuts by eliminating deductions.

thomhall says

Without a flat tax there is no way to prevent social engineering in Washington. If we had a flat tax, what would Senators do with all that extra time they now spend writing and debating bills that socially engineer different results??? They would be tax and spend social engineers without the tools necessary to screw things up like they have been doing for the past 75 years!

What kind of "flat tax" do you propose? Percentage of income? Sales tax? Absolute value tax?

There are plenty of ways to screw it up.

grywlfbg says

In a perfect world I’m for a ~12% tax on every dollar of income no matter the source - no deductions of any kind.

Great, what are you going to cut to make up the revenue shortfall? 12% income tax would get you to about half of the current budget. Your only real options are:

- Social Security / Medicare (which already have independent flat, regressive taxes)
- The military

Pick one.

EBGuy says

It was a 2/1 (not quite 1,000 sq.ft) that sold for ~$220k in Oct. 1997 and ~$620k in Jan. 2007 (the seller should get an award for timing the peak).

He did.

Oh, its going to get ugly here in the Bay Area.
These figures forecast the percentage of homeowners who are expected to be at least 60 days behind on their mortgages in the fourth quarter of 2009.
U.S.: 6.93 percent
Bay Area*: 9.45 percent
California: 14.16 percent
@HeadSet, Good Point!