patrick.net

If they phase it in, it'll just become another item they will use (like AMT, unemployment extensions, marriage penalty, etc) to trade in negotiations in the crappy two party system that we have. I'll gladly give you an extension of the mortgage deduction, if you'll buy me a burger on Tuesday...

According to the article above they are talking about lowering the max deduction to 500k from 1 million, which would be fine and good for most of the county, but places like California would suffer the most, since most houses are over 600k to begin with.

In this industry, if you remove artificial government subsidy prices go down to what people afford.

Current interest rate subsidy like this just forces people to be priced out. It's like inflation, if you give everyone $50 to buy pencils, prices will go up by $50 on pencils because prices are a function of afford ability.

I don't think that they are that stupid as to not grandfather in the deduction for existing mortgages. They would have to cut off the decution only for new mortgages or refinances.

zzyzzx says

I don’t think that they are that stupid as to not grandfather in the deduction for existing mortgages. They would have to cut off the decution only for new mortgages or refinances.

May be this could be a new Realtor strategy, "buy now or you will never be able to get tax deduction on your mortgage payment"

I believe the cut off will be a progressive manner. If the mortgage is 600k, then only the interest generated by 100k over the limit cannot be deducted. The impact will be as huge as we like to see. Of course, the million dollar mansion will see huge tax liability. However, they are rich enough to weather the additional tax or they are really over stretch.

If mortgage interest is no longer deductible, could it be write off in the capital gains?
Suppose you buy a 100K house with 0% down with a 10 years loan with 100% interest in 10 years. At the end of the 10th year you'd had paid 200K (principal + interest) but you haven't deduct a thing.
If you sell the house for 250K, what would be your capital gain? 50K or 150K?

We should write ALL tax law to be phased in over 10 years ; )

To my knowledge, any proposal to mess with the "MID" went nowhere.

nevermind the mortgage interest deduction, our president and congress can't even reverse the bush tax (at least for the rich) cut after all the talk from campaign through now.

In governement, once you give something. (new programs or tax policies) It is hell to take it back.

Correct me if I'm wrong but it seems to me that the MID is really not even that useful for middle income folks unless they have MANY deductions?

My wife and I did not use the MID in our affordability calculation since we have so few deductions to begin with (and no kids).

In other words, it benefits rich people more than middle income couples or families.

Actually your taxes would not go up that much, since every couple gets a $11,700 standard deduction anyway.

If you itemize and take the $20K of mortgage interest as a deduction instead of the standard deduction, then you are taxed on $8,300 of income that was previously untaxed.

At 28% that's an additional $2,324 in taxes.

And for everyone who has less than $11,700 to deduct, removing the mortgage interest deduction won't change anything for them. I think that's more than half of everyone with a mortgage.

"73 percent of those filing income tax returns do not use it." from http://news.yahoo.com/s/ac/20101025/bs_ac/7044522_is_the_mortgage_interest_deduction_on_the_way_out

The primary beneficiaries of the mortgage interest deduction are wealthy people who don't really need it.

"If you itemize and take the $20K of mortgage interest as a deduction instead of the standard deduction, then you are taxed on $8,300 of income that was previously untaxed."

The theory is inaccurate as if you have earned income you will surely have state income tax, state personal property tax (vehicle) and state disability insurance tax which are all deductable under the tax category. Then your donation to salvation army are all itemizable as well. Then you have the deduction from property tax from owning. Now instead of 11,700 in standard deduction you have 20K in MID 5K in property tax and 10K on the items noted above to aggregate to about 35K a delta of 23K. @ 28% that is 6K in tax benefits. In a high tax state like CA which follows the federal system, it is an additional 2K in tax savings.

The mortgage interest deduction is the most lucrative in places like SFBA, New York Metro and worthless in 43 other states like Florida, Nevada and Arizona. Therefore, applying a blanket rent to value ratio in every area does not make sense as the financial dynamic is different. That's why point #1 and #2 on your banner page while it makes sense on a macro level fails in the real world.

If tomorrow congress eliminated the mortgage interest deduction tax write off, I predict there would be a HUGE increase in the number of foreclosures.

Yes, then the forclosed upon could rent a suitable place for much less, and use the new cash flow for savings, affording more products, and eating out more often. It would take money that would go to banks and put it into the local economies.

SF ace says

“If you itemize and take the $20K of mortgage interest as a deduction instead of the standard deduction, then you are taxed on $8,300 of income that was previously untaxed.”
The theory is inaccurate as if you have earned income you will surely have state income tax, state personal property tax (vehicle) and state disability insurance tax which are all deductable under the tax category. Then your donation to salvation army are all itemizable as well. Then you have the deduction from property tax from owning. Now instead of 11,700 in standard deduction you have 20K in MID 5K in property tax and 10K on the items noted above to aggregate to about 35K a delta of 23K. @ 28% that is 6K in tax benefits. In a high tax state like CA which follows the federal system, it is an additional 2K in tax savings.
The mortgage interest deduction is the most lucrative in places like SFBA, New York Metro and worthless in 43 other states like Florida, Nevada and Arizona. Therefore, applying a blanket rent to value ratio in every area does not make sense as the financial dynamic is different. That’s why point #1 and #2 on your banner page while it makes sense on a macro level fails in the real world.

SF ace, I totally agree with you that in the Bay Area, the MID is more lucrative.

We sold our home two years ago in Menlo Park, and have been renting while waiting for the market to drop. It has come down, but I feel it still has a way to go. Meanwhile, we are getting KILLED on our taxes! We are in that terrible bracket where we make too much so we pay the maximum tax, yet we are barely getting by (not due to spending on rent, etc, but through gross vs. take home).

We made a decent profit on the sale of our home two years ago, and we are doing everything possible to keep that protected, but we have to find some kind of shelter.

How are the other renters doing it around here? Our accountants advice was to take out more estimated taxes for next year! Surely, there has to be some alternative!

SF ace says

“If you itemize and take the $20K of mortgage interest as a deduction instead of the standard deduction, then you are taxed on $8,300 of income that was previously untaxed.”
The theory is inaccurate as if you have earned income you will surely have state income tax, state personal property tax (vehicle) and state disability insurance tax which are all deductable under the tax category. Then your donation to salvation army are all itemizable as well. Then you have the deduction from property tax from owning. Now instead of 11,700 in standard deduction you have 20K in MID 5K in property tax and 10K on the items noted above to aggregate to about 35K a delta of 23K. @ 28% that is 6K in tax benefits. In a high tax state like CA which follows the federal system, it is an additional 2K in tax savings.
The mortgage interest deduction is the most lucrative in places like SFBA, New York Metro and worthless in 43 other states like Florida, Nevada and Arizona. Therefore, applying a blanket rent to value ratio in every area does not make sense as the financial dynamic is different. That’s why point #1 and #2 on your banner page while it makes sense on a macro level fails in the real world.

All true until you come up against AMT. In places like SFBA and NY metro a married couples like teachers, cops, accountants, managers, whatever would have incomes high enough to get into AMT. This will be much worse if the lame duck congress fails to pass another temporary exemption. Very possible in the current political climate. More real world variables.

If the MID were grandfathered, it would still depress house prices. People selling would get the same price people buying were willing to pay, and the buyers would not get the MID. The only ones to benefit from MID would be those with higher income paying interest on a large mortgage and keeping the loan. This would be such a small minority of cases that whether MID were grandfathered or not would have virtually no impact on prices. Prices would go down when MID was eliminated.

I thought the whole point of mogrtage interest deduction was to ensure that regular people were not at a disadvantage in buying a home relative to businesspersons buying a home to rent out, since the latter class of people necessarily could always deduct (mortgage) interest as an expense.

Phasing out MID (aka. grandfathering in existing owners) is giving to the haves by taking from the have-nots. An extremely bad and unfair idea.

Is it not bad enough that California Prop 13 already does this for property tax?

justme says

since the latter class of people necessarily could always deduct (mortgage) interest as an expense.

that can be fixed.

So far we heard of MID why not eliminate tax free gain of $500k when sold after two years, be make it too long to spend the time as primary resident like 10 or 20 years or more if the gain has to be realized tax free. If they are talking about community building why encouraging to move with tax free gains even within the same community. If all these are eliminated probably house would have been affordable to more people.

Any change in the middle of the game is not fair for some.

loveuser says

So far we heard of MID why not eliminate tax free gain of $500k when sold after two years,

I'm all for it. The tax free capital gain is a blatant giveaway to the older generation at the expense of the younger one.

Troy says

Justme says

since the latter class of people necessarily could always deduct (mortgage) interest as an expense.

that can be fixed.

How would yo do it, exactly? And do any of the current proposals to eliminate MID contain such provisions?

In principle, it may be easy to disallow MID for investor/businesses. In practice I think it will be very tricky to make an airtight law that disallows MID also for investors, but without having unintended consequences.

What about apartment buildings? What about mixed-use commercial/residential buildings? What about a company that buys housing to provide for their employees. There are many wrinkles to the concept of MID.

Added:

What if you build a commercial building in order to get MID, but then have a sneaky plan to convert to residential units later with the help of some crafty initial floor planning and construction methods? I just don't see how one can make simple rules about these things.

Is 2-level quoting broken? I select what Troy and I said but the quote collapses what I said and what Troy said into just one level of hierarchy.

Am I doing something wrong?

justme says

Phasing out MID (aka. grandfathering in existing owners) is giving to the haves by taking from the have-nots. An extremely bad and unfair idea.
Is it not bad enough that California Prop 13 already does this for property tax?

The MID itself gives to the haves by taking from the have nots. If you don't own a home of don't qualify to itemize your MI then you are a have not. So doesn't that make the MID an extremely bad and unfair idea?

bob2356 says

The MID itself gives to the haves by taking from the have nots.

Not exactly. It puts individuals on the same footing as investors and businesses,
Renters still get the standard deduction, but I agree this is not 100% fair.

bob2356 says

So doesn’t that make the MID an extremely bad and unfair idea?

The big picture is to try to avoid that people become the equivalent of sharecroppers or serfs with respect to housing. That is the most important principle in my view.

If renters do not have the prospect of MID, but their landlords do, the landlords will always be able to outbid renters when buying an available housing unit, and the renters will stay in serfdom forever. If landlords can always front-run renters in the housing market, renters will not stand a chance. Think "Banana Republic"

Not to bob2356 in particular:

Look, I agree it is better if we do not push housing prices up by having MID. The problem is that there is a class of people (business owners) that can deduct all kinds of expenses, including mortgage interest, no matter what the interest is for. It will be a cold day in hell when that particular feature of the tax code goes away. In the meanwhile we have to make sure that regular people are on equal footing with business owners when it comes to purchasing housing. I really think it is as simple as that.

TechGromit says

According to the article above they are talking about lowering the max deduction to 500k from 1 million, which would be fine and good for most of the county, but places like California would suffer the most, since most houses are over 600k to begin with.

This is simply not true. MOST houses in California are nowhere near 600k. There are a few pockets where the median is even close to 600k. At this point one could easily find a 2000sf home in the Bay Area in a decent middle class neighborhood for considerably less than 600k. Since the market crash it would only effect people in areas that can afford it. If you ability to survive means you NEED that deduction between 500k-1MIL, you are in too expensive a house and need to reduce your lifestyle a bit.

justme says

How would yo do it, exactly?

Possibly the same way depreciation is handled -- can only deduct the improvement interest cost, not the land component.

Plus we need to get more serious about accurately calculating unimproved land values.

And do any of the current proposals to eliminate MID contain such provisions?

LOL. Hell no. LLs write the tax and rent law.

Troy says

LOL. Hell no. LLs write the tax and rent law.

Okay, so I think we agree that getting an ideal and fair solution to replace MID is not going to be easy.