patrick.net

The Wikipedia page for the mortgage interest deduction is interesting.
http://en.wikipedia.org/wiki/Home_mortgage_interest_deduction

One part:

Under 26 U.S.C. § 163(h) of the Internal Revenue Code, the United States allows a home mortgage interest deduction, with several limitations. First, the taxpayer must elect to itemize deductions, and the total itemized deductions exceed the standard deduction (otherwise, itemization would not reduce tax). Second, the deduction is limited to interest on debts secured by a principal residence or a second home. Third, interest is only deductible on up to $1 million of debt used to acquire, construct, or substantially improve the residence, or on up to $100,000 of home equity debt regardless of the purpose or use of the loan.

The framework for phase out is already there. Start moving the threshold down over time: For example, $50 - $100K per year for the $1M limit (and maybe as the limit decreases, increment it down in smaller amounts), and $10K per year max for the home equity debt.

The rest of the page is very interesting. It covers many of the points discussed in this thread. Worth a read...

MarkInSF says

The deduction isn’t going anywhere. It would instantly collapse the prices of real estate, leaving many millions more underwater on their loans.

You say that as if that is a bad thing.

Adding to Para comments...

Home Equity Debt Limit
There is a limit on the amount of debt that can be treated as home
equity debt. The total home equity debt on your main home and
second home is limited to the smaller of:
1) $100,000 ($50,000 if married filing separately)
2) The total of each home's fair market value (FMV) reduced (but
not below zero) by the amount of its home acquisition debt and
grandfathered debt. Determine the FMV and the outstanding
home acquisition and grandfathered debt for each home on the
date that the last debt was secured by the home.

The interest on $15,000 of the home equity debt is fully deductible.
The interest on the remaining balance of $30,000 is generally
treated as personal interest and is not deductible.

native94027 says

MarkInSF says
The deduction isn’t going anywhere. It would instantly collapse the prices of real estate, leaving many millions more underwater on their loans.
You say that as if that is a bad thing.

Like everything else you phase it out over time.

People are already underwater due to overpaying on homes regardless of the tax laws.

native94027 says

MarkInSF says

The deduction isn’t going anywhere. It would instantly collapse the prices of real estate, leaving many millions more underwater on their loans.

You say that as if that is a bad thing.

If you think it's a good thing because it would drive down home prices, it wouldn't. It would be a total wash as far as debt service and housing affordability goes. You would need a smaller loan, but your real payments after taxes would still be the same.

It it a bad thing, because people being underwater in their homes, and banks being crippled by losses has bad consequence for the real economy.

Paralithodes says

Mark, what exactly is your argument? Are you for or against terminating the mortgage deduction?

I'm against removing the deduction because it creates an asymmetry between landlords and individual homeowners. The deduction supposedly distorts the housing market, but one person able to deduct the interest and another not is clearly distorted. Just look at my example of the condo neighbors swapping places and renting to each other so they can both take the deduction. That demonstrates how absurd this asymmetry would be.

I'm also for a complete overhaul of the tax system which does not involve a progressive income tax, but that's a whole other issue.

MarkInSF says

If you think it’s a good thing because it would drive down home prices, it wouldn’t. It would be a total wash as far as debt service and housing affordability goes. You would need a smaller loan, but your real payments after taxes would still be the same.

It it a bad thing, because people being underwater in their homes, and banks being crippled by losses has bad consequence for the real economy.

The deduction was a form of 'debt relief', if it has no impact then it should be repealed. If has has no impact on prices as you state, it would not have bad consequences for the economy. Banks would still lend regardless of deduction. Business as usual. You might as well put in now, so home prices do not get out of hand down the road.

thomas.wong1986 says

MarkInSF says

If you think it’s a good thing because it would drive down home prices, it wouldn’t. It would be a total wash as far as debt service and housing affordability goes. You would need a smaller loan, but your real payments after taxes would still be the same.
It it a bad thing, because people being underwater in their homes, and banks being crippled by losses has bad consequence for the real economy.

The deduction was a form of ‘debt relief’, if it has no impact then it should be repealed. If has has no impact on prices as you state, it would not have bad consequences for the economy. Banks would still lend regardless of deduction. Business as usual. You might as well put in now, so home prices do not get out of hand down the road.

Sorry, I didn't state that clearly. Let me edit that....

MarkInSF says

If you think it’s a good thing because it would drive down home prices, it would would drive down home prices, but that would not be a good thing for home buyers because it would be a wash in terms of after tax mortgage payments.

MarkInSF says

I’m against removing the deduction because it creates an asymmetry between landlords and individual homeowners. The deduction supposedly distorts the housing market, but one person able to deduct the interest and another not is clearly distorted.

I'll take that asymmetry if what I get in return is seeing my kids being able to afford a house a little easier and not being encouraged by the goverment to be debt slaves, by encouraging them to take on more debt than they might actually take otherwise.

Any change of a process, regardless of what it is, is asymmetric somewhere. If the choice is keeping something that is wrong, because it creates some type of perceived asymmetry, or fixing something, even if not 100%, I'll take the latter. Some change can be evolutionary - it doesn't all have to be revolutionary.

As far as your concerns about asymmetry...we're all talking hypotheticals anyway now so.... lower house prices would likely result in price pressure on landlords - the whole rent vs. own thing. Also, removing interest from being a business expense would cause some landlords to raise rents. While you might consider this to be a good thing because it might make them less competitive against home ownership, it would end up hurting those who are the least likely to afford a house in any case. Why would anyone want to cause that to happen?

MarkInSF says

I’m against removing the deduction because it creates an asymmetry between landlords and individual homeowners.

Kill it for both for SFHs and condos. Renting these out shouldn't be considered a "business" worth subsidizing since nothing of value is being created.

Symmetry restored & Problem solved.

it would would drive down home prices, but that would not be a good thing for home buyers because it would be a wash in terms of after tax mortgage payments.

All ad-valorem costs in real estate would be cut. We're talking a ~$100,000 price cut on the $450,000 property. This is not peanuts.

robertoaribas says

Mark you are offer your rocker! Landlords pay taxes on their NET income,

Off my rocker? Right, the depreciation is only a deferral (supposedly), but interests deduction is never recaptured. Who said anything about paying taxes? Lots of rental properties operate at a "loss" that deducts from their owners personal income. The two condo owners swapping properties can avail themselves of the interest deduction by operating at a loss, and having it flow through to their personal income.

I've said it before, but the funny thing is if they wanted to SAVE the entire post-bubble economy ca. 2007 what they could have done was convert the tax deduction into a tax credit.

Woulda cost $300B a year maybe and would have preserved the high levels prices had got to and kept everyone happy and housed.

The recession was a double whammy tho since it was HELOCs and cash-out refis that were driving most of the "growth" 2004-2006. That game was about over in 2007, regardless.

MarkInSF says

If you think it’s a good thing because it would drive down home prices, it would would drive down home prices, but that would not be a good thing for home buyers because it would be a wash in terms of after tax mortgage payments.

1) Wash or not, the buyer would not be encouraged and perceive to be rewarded for taking on more debt. Why would we want to encourage or reward more debt?
2) For those who are concerned about distribution of wealth, it would address the "asymmetry" of who gets the most bank for the buck (aside from the REIC, that is). As Roberto describes above (#3), deductions against income in the highest tax brackets are worth much more than deductions that are in the lowest, that barely scrape by the standard deduction.
3) For those who want to raise taxes, especially on the "rich," or who are concerned about the government raising revenue, this is one way to do it, "wash" or not.
* How much $$ does the government collect when someone deducts $10,000 mortgage interest from their income, that would have otherwise fallen in the 32% tax bracket? Answer: $$Zero.
* If the same person in the 32% bracket has only $6800 in non-deductable mortgage interest due to the "wash" that you describe above (lower price and smaller loan due to lack of deduction). They would have to earn $10,000 to be able pay this interest. How much does the government collect from the before tax income required to pay that $6800? Answer: $3200.

This sounds like a win-win to me.

Troy says

Kill it for both for SFHs and condos. Renting these out shouldn’t be considered a “business” worth subsidizing since nothing of value is being created.

But it's not a subsidy. It is a real business expense, just as real as changing the carpets. You pay $1000 to the bank, but only have $500 gain on your principal. It's a $500 interest expense.

I understand where you're coming on landlords not producing anything, and just being "rent collectors". I don't think that situation will change any time soon though.

MarkInSF says

You pay $1000 to the bank, but only have $500 gain on your principal. It’s a $500 interest expense.

Oh, and by the way, if you're going to get rid of mortgage interest deduction for landlords, you'll have to get rid of mortgage interest deductions for all businesses. And that immediately blows up the banking system, since they would have pay taxes on the interest they collect, but not be able to deduct the interest they pay to their depositors. Unless of course you also got rid of taxes on interest income....

But weren't you just complaining about income from no productive effort?

MarkInSF says

Troy says

Kill it for both for SFHs and condos. Renting these out shouldn’t be considered a “business” worth subsidizing since nothing of value is being created.

But it’s not a subsidy. It is a real business expense, just as real as changing the carpets. You pay $1000 to the bank, but only have $500 gain on your principal. It’s a $500 interest expense.
I understand where you’re coming on landlords not producing anything, and just being “rent collectors”. I don’t think that situation will change any time soon though.

Some landlords provide a service to some people who otherwise would not be able to afford a place to live. Therefore, some "produce" a place to live to some of those who need it, while absorbing all risks associated with that property (i.e., new carpets, paint, etc., every year or two, service calls for simple things, damage and destruction, etc.). Increasing their expenses across the board with a special rule specifically excluding mortgage interest on the property as a business expense, will simply result in increased costs for those least likely to afford it.

It will also crowd out all but the largest "landlord" companies who can afford to purchase properties without mortgage liens. It would be just another special rule that benefits larger companies at the expense of small businesses, just because someone doesn't like the nature of that small business.

Paralithodes says

Some landlords provide a service to some people who otherwise would not be able to afford a place to live.

Yes, they provide a service, but most of the value of the rental housing business comes from the non-productive asset of the land.

It's not so obvious here, but in many countries raw land is commonly leased, and the rental housing provider or other business has to make their profit on top of what they pay to the landlord (A real true landlord, not a rental housing provider).

Paralithodes says

For those who are concerned about distribution of wealth, it would address the “asymmetry” of who gets the most bank for the buck

When I talk about asymmetry, I'm not even talking about the distribution of wealth issue. I'm talking about the absurdity issue. See my two-condo-owners-renting-their-places-to-eachother scenario which I've already mentioned twice.

MarkInSF says

When I talk about asymmetry, I’m not even talking about the distribution of wealth issue. I’m talking about the absurdity issue. See my two-condo-owners-renting-their-places-to-eachother scenario which I’ve already mentioned twice.

I simply re-used your word in another example, because it seemed to be the most fitting word. Perhaps I shouldn't have put it in quotes. Sorry for the confusion.

Paralithodes says

It will also crowd out all but the largest “landlord” companies who can afford to purchase properties without mortgage liens

Taxing rents on SFHs and condos would keep these operators out of the easy game of monopolizing existing housing stock and incent them to redevelop new MFH.

Corporations and REITs buying SFHs to rent out is extremely fucked up. What the hell?

Troy says

Corporations and REITs buying SFHs to rent out is extremely fucked up. What the hell?

Is your argument against this occuring specifically with SFH's or with all properties (e.g., condos, apartment buildings, etc.? If the former, I can understand much more where you are coming from. Not sure that I agree - or disagree - at this point, but can understand it at least.

Paralithodes says

Not sure that I agree - or disagree - at this point, but can understand it at least.

I think REITs like Avalon are partially scumsuckers but they are at least creating quality capital development -- needed multifamily housing -- that government has historically done a really bad job at providing.

The real rent capture and economic injustice of MFH REITs is their Prop 13 protections.

I have absolute zero problem with REITs getting a solid return on their construction and management costs, but the return they get from rising ground rents is an example of getting something for nothing and could be taxed quite a lot with zero harm to the wider economy.

A great deal of benefit, actually, if these taxes displace more harmful taxes. Milton Friedman allegedly said it best:

"In my opinion the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago"

http://www.cooperativeindividualism.org/friedman-milton_interview-1978.html

Unlike Apple, Intel or any other public companies, REIT's are not taxed at the entity level provided they return 90% of the earnings. That is a huge structural advantage (cash flow) to owing REIT's and entities operataing as REIT, particularly if they are in a non-tax accunt such as an IRA/401K where even the tax on the dividends are deferred.

I strongly believe that everyone should choose REIT in their 401K/IRA portfolio.

Anyway, browsed the transcripts for Avalon Bay.

"The sequential improvement in rental rates was widespread as five of our six regions posted sequential rental rate growth of at least 1.7%. During the third quarter, increases in rents for those units with expiring lease, which includes renewals and new move-ins averaged 5% to 5.5%. Renewals were up by almost 6%, while new move-ins increased by over 4% during the quarter."

and...

"Based upon the strength and demand combined with the sharp reductions in supply, we are projecting demand-supply rates in our markets over the next two years to be similar to what we experienced in the 2005 and 2006 time period, which is a period of strong rental growth."

In other words, huge Rent escalation if not already here is coming.

Troy says

Not sure that I agree - or disagree - at this point, but can understand it at least.

I asked you whether you were refering to SFHs primarily or all properties. But on reviewing the thread, you did in fact explain clearly what you meant earlier on ... my bad for essentially asking you to repeat it:

MFH is more clearly a form of capital and we should encourage LLs to create and maintain this capital development by allowing reasonable capital returns from their capital investments.

SFHs are created for families not investors, and investors moving into this area push out households from owning their own home, making them slaves in their own land instead.

Your points there, and in further response to my question/comment above, make perfect sense.

Accomplished today: E-mailed to one of my Senators a statement of support for completely phasing out the mortgage deduction. ... Even included Troy's point regarding how this benefits no one but the real estate industry (benefits to home buyers are illusory). I have adopted that point into my own reasoning on the issue.

Well, not having a mortgage deducation may be a good thing. Maybe less FOOLS will buy based on the concept they are saving money by buying a house and lowering their taxable income by 5-10K of interest.

Well what can I say, your closer going to prison for tax evasion than many others.
Give my regards to the other self professed "tax experts" you meet there.

thomas.wong1986 says

Well what can I say, your closer going to prison for tax evasion than many others.

Give my regards to the other self professed “tax experts” you meet there.

Thomas, chill out dude. We cannot be thin skinned about rich folks who like to strut "in your face" or whatever, because The Fortress and The World are full of them. Besides, the rich can just pay any penalties if they're ever assessed. He won't be going to prison.
I'd be more concerned about the public disclosures about his partner (spouse). A mortgage is a contract. Probably, to knowingly lie on a contract is contract fraud, and is probably something that could jeopardize a lawyer's legal status.

The mortgage interest deduction is certainly interesting. It's hard to discuss without understanding the mechanics.

It cost the federal government 100B a year and certainly it cost the states an aggregare of tens of billion as well. The majority of the benefit goes to households in the 100K -300K range with the highest benefit around 250K. Also, the tax benefit is way diluted in states like Florida and Texas which does not have state income tax but is very valuable in coastal CA, metro New York and Boston where state income tax are high.

From that perspective, really only 5-6% of the household benefit from this deduction and it is heavily scewed to housholds in SFBA, Coastal LA, SD, NY Metro, Boston and other high cost cites. The other 90% or so of the taxpayer is subsidizing the 5-6%. It makes a 1M place easily afforadable when the fed/state subsidize 20-25K a year.

But then again, the rich have their dividends and preferred treatment of gains and the poor taxpayer have a bunch of tax credits too.

SF ace says

It cost the federal government 100B a year and certainly it cost the states an aggregare of tens of billion as well. The majority of the benefit goes to households in the 100K -300K range with the highest benefit around 250K. Also, the tax benefit is way diluted in states like Florida and Texas which does not have state income tax but is very valuable in coastal CA, metro New York and Boston where state income tax are high.

You have to factor AMT into those income ranges, which goes against CA, NY, etc.. It might be a wash. Either way the mortgage deduction is very little benefit to most people.

Interest is deductable for AMT and AMT rate is lower than the standard tax rate in that bracket. It is around the 200-250K level when AMT starts to come into play, but never-the-less still significant. In the end, the AMT tax is a tax credit attribute to your regular tax prospectively, so your AMT tax will be recovered subsequently.

There is no AMT for state tax (or standard deduction) so there is no state income tax dilution.

Is it just me ? Or any time the people suggest trimming the size of the CONTROL.... I mean the GOVERNment, the government threatens to sever benefits of everyone. The Government says that if we are forced to give up our wet bars and our top heavy staff of underqualified deadbeats we will cut your homeowners benefits, we will cut police protection, we will cut education.

Do we need to implement a government agency that trims overspending and useless agencies. Or who will oversee that oversight committee ?

Oh what the hell... lets ALL become government employees.

I'm probably in the minority here but I find it hard to believe that most people budget the tax savings into their calculation of how much house they can afford. That's just way too much work.

And I don't doubt the work of others on the standard deduction, but it seems to me that most homeowners would qualify. When you add property tax, state income tax (or sales tax), and mortgage interest, I don't see how the vast majority of people don't itemize.

tatupu70 says

I’m probably in the minority here but I find it hard to believe that most people budget the tax savings into their calculation of how much house they can afford. That’s just way too much work.

It's an implicit consideration in loans that are given. Basically the bar is set based on probability of default. With the MID, they are less likely to default based on current loan to income rates. Without the MID, they would need to recalculate and lower the amount of income allowable for the mortgage. So even if the buyers don't calculate it (and many do, and in fact over estimate it), it has an indirect impact on the loans they can receive.

tatupu70 says

I’m probably in the minority here but I find it hard to believe that most people budget the tax savings into their calculation of how much house they can afford. That’s just way too much work.

Most people probably do calculate it but do it wrong. I had one turkey tell me "But considering the deduction, you'll get 25% of your interest back in taxes". Not only is this just wrong and leaving the standard deduction out of the equation, the "return" diminishes over time as your P&I payments change to more P than I over time.

Paralithodes says

You are most likely correct in that most people don’t actually calculate the return. But I believe you are incorrect in that it is not something generally used in consideration of a home price. Otherwise, why would realtors use it as part of the sales pitch?

Because they will say anything to get you to buy something?!? It's just another line of BS (buy now or you'll be priced out, real estate never goes down, the seller is paying my commission, etc) they use to line their pockets. Of course, there are probably plenty of these bloodsuckers that actually BELIEVE the BS they are spewing...

EightBall says

Not only is this just wrong and leaving the standard deduction out of the equation

Here in California, state withholding is a bitch. Anybody making programmer money will pay more in state income tax than the standard deduction.

Paralithodes says

But in any case, the commission wants to reduce the max from $1M to $500K of MID.

Yes--and I agree wholeheartedly with that recommendation. I'd lower it further than that. $100K sounds more reasonable to me.

I was going to say just get rid of the MID entirely but I like the idea of $100k also....that way, those more likely to truly need the MID will get it.

Whatever the number, this needs to be done. I'm benefiting from the MID and I would definitely feel it in the event it vanished. However, I really do believe the deficit is so serious that it will require an "all hands on deck" approach. It is long overdue.

Wouldn't it be refreshing to see politicians on both sides embracing the seriousness of the issue and uniformly getting the message out there to the public that sacrifices will need to occur. All the recommendations of the panel should be enacted, starting with severe cuts to the obscenely bloated defense budget and going from there. But, the politicians won't because they act with the short term in mind and concern themselves more with reelections than governing. I vote democratic but was disappointed to see Pelosi react to the panel's findings by declaring that SS and Medicare are off limits. Unfortunately, we must address them. People don't like rationing benefits or losing benefits. I understand that. I have paid into the system too. Yet, bottom line, there is not enough to go around. Our society is going to have to look at things with a new perspective and begin to accept that some of the benefits that have been promised have exceeded our ability to provide. I'm not suggesting the disadvantaged by abandoned but the current situation puts the majority at risk. And, yes, taxes need to go up across the board but with progressively higher contributions demanded of those at the highest and most comfortable end of society.

Troy says

Here in California, state withholding is a bitch. Anybody making programmer money will pay more in state income tax than the standard deduction.

Ouch - that's gotta hurt! How does a regular person afford to eat in California?

Is this the way taxes work out there?

How California State income tax rates are structured