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.