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Is It Time to End the Mortgage Tax Deduction?

Posted by dave_donhoff (dwdonhoff@hotmail.com) on
Mon, Nov 15, 10 at 14:28

Is It Time to End the Mortgage Tax Deduction?

http://www.cnbc.com/id/40196343


It was floating around as a less-than-politically-enticing possibility for a while, and then the president's deficit commission gave it legs. They proposed taking a hack saw to the mortgage interest deduction, and slimming it down to size.

It is *highly probably* mere noise... as it would be truly disastrous to any remaining respect the Democrats hold... *AND* the banking puppetmasters won't allow its demise (see below.)

AND, I know I will be generally unpopular and discredited (let alone disbelieved, due to my career & industry) for my opinion.... HOWEVER....

YES... IT IS TIME!!!

The housing market will be affected THE LEAST by the removal of this market corrupting subsidy when the housing market is at its over-sold worst... which, if not there already, is close at hand.

It is completely uneccessary, and unsuccessful. The *ONLY* buyer/seller beneficiaries of this subsidy were those who used it to buy homes with cheaper money than the sellers had access to (in other words, only the buyers within the first 3-7 years of the subsidy...) because any subsidized buyer who is buying from a seller who bought using subsidized loans got a net zero advantage.

IN REVERSE... any subsequent effect that is actually measurable on the the currently depressed housing market will primarily the sellers who bought on subsidized loans and are then selling to non-subsidized buyers... and even then, it will only have any effect at all for the same 3-7 year inventory turnover period. Then everyone once again will be on the same market footing as before when everyone was buying & selling on a subsidized level.

The net "LOSERS" of cessation of this subsidy? NOT THE BUYERS/SELLERS... NO, it is the lending industry itself... all the way up to the bond markets (and by extension back to the fixed-income investors on Maple Street, unfortunately... but again, the most muted effect ever would be to get it done NOW, not later.)

This subsidy had been effectively using taxation to redistribute wealth from those who can't avoid paying taxes (primarily standard wage earners) to the lending industry.

AGAIN... this is probably the biggest reason it will remain... but if it were EVER to be excised as the cancer that it is, NOW is the time economically.

Cheers,
Dave Donhoff
Leverage Planner

Here is a link that might be useful: [CNBC] Is It Time to End the Mortgage Tax Deduction?


Follow-Up Postings:

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RE: Is It Time to End the Mortgage Tax Deduction?

Is it time? No, it is long past time from an economic standpoint. That is, assuming that rates are reduced so that it is revenue neutral. (obviously it won't be neutral for each individual, but on the whole.) It is a completely unnecessary inefficiency in the system.

On the flip side, it is definitely not time for politicians to act if they want to get re-elected. It's incredibly popular and allows many americans to "get a refund" at the end of the year. For some reason, people just seem to prefer that over not being taxed so much in the first place.


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RE: Is It Time to End the Mortgage Tax Deduction?

I'm sure glad we don't have it here in Canada. Instead, the sale of a principal residence is tax-free.

Some stats.. not sure how the US compares, but I expect the US mortgage interest deductibility has an impact:

•Number of Canadian homeowners: 9.3 million
•Number of mortgage holders: 5.55 million
•Average Canadian mortgage: $138,000
•Average home equity for mortgage holders: $159,000
•Average loan-to-value: 46%
•93% of mortgagors have never missed a payment


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RE: Is It Time to End the Mortgage Tax Deduction?

I'm sure glad we don't have it here in Canada. Instead, the sale of a principal residence is tax-free.

For most home sellers in the States the sale of a principal residence is also tax-free.


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RE: Is It Time to End the Mortgage Tax Deduction?

Thanks, terriks, I didn't know that.


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RE: Is It Time to End the Mortgage Tax Deduction?

I don't necessarily disagree that it should go away but it does look like a terrible time to do it. All you are doing is reducing the buyer's pool by increasing the effective mortgage payment. It is the equivalent of raising interest rates which is not usually what makes sense in a recession (even if it is over).

Pity the poor folks who are at 7% and can't refinance because they are underwater. That loss of deduction could tilt the balance in favor of foreclosure. Why when record foreclosures are occurring would this be a good idea?

Just new borrowers? Oh - lets make the workforce even less mobile than declining prices have done.

I'll grant you a phase out over 20 years. It is currently capped at $1M. Cut it by 100k every 2 years. Most people won't be affected until this housing glut is a distant memory.

Oversold? Hard to say. Lots of vacant houses. Lots of foreclosures yet to hit the market. Does anyone really think growth in prices is likely in the next 5 years?


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RE: Is It Time to End the Mortgage Tax Deduction?

Only if you want to further drag out the market turmoil.


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RE: Is It Time to End the Mortgage Tax Deduction?

I agree with david cary and brickeyee.
It is an asinine idea, given the housing market...and in principle as well.

I find it nothing short of appalling that those who were screwed the most by the actions of the finance sector are also those who are continually squeezed to pay for the reprehensible actions of that sector which resulted in the destruction of the global economy....while those responsible continue to collect huge salaries and even bigger bonuses.

The inmates are indeed running the asylum.


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RE: Is It Time to End the Mortgage Tax Deduction?

"It is an asinine idea, given the housing market...and in principle as well. "

So, in principle, you think that if 1 person pays $1,000 in rent and 1 person pays $1,000 on a mortgage, then the renter should pay more in income taxes? Why?


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RE: Is It Time to End the Mortgage Tax Deduction?

End the deduction, it's primarily a subsidy to the rich and upper middle class. The standard deduction is 11,400 for a couple. If your paying more than that in interest and tax, I don't think you need a subsidy (and I fall in that group). The same goes for charitable donations. I do agree it would need to be phased in over a 10+ yr period. Buying a house should not change what tax income bracket you are in. This also provided more fuel to the sub-prime bubble.

Here is a link that might be useful: who benefits for the mortgage interest deduction


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RE: Is It Time to End the Mortgage Tax Deduction?

"So, in principle, you think that if 1 person pays $1,000 in rent and 1 person pays $1,000 on a mortgage, then the renter should pay more in income taxes? Why? "

Why not?

We made a decision as a nation many years ago to encourage home ownership instead of lifelong rental.


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RE: Is It Time to End the Mortgage Tax Deduction?

"Because we have before" isn't a good reason to keep doing something. Currently, most people do not buy a house and then live the next 30 years plus living there and paying it off. In an increasingly mobile society, the idea of an ownership subsidy is pretty outdated.

Besides, the "subsidy" is counterproductive. The tax break makes home ownership a better deal. That drives demand up. Higher demand causes higher prices. That means homes are relatively more expensive but then tax money is used to subsidies people paying for them. Government is "fixing" a problem it has caused!


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RE: Is It Time to End the Mortgage Tax Deduction?

If we really want to reduce the gradually increasing volatility swings and bubble prevalence, we have to wake up & smell the rancid cat food which is "tax based social engineering."

Subsidies directly encourage bubbles, and subsequent collapses. If we're intending to do any better than lip service to the idea of economic stabilization, we have to begin unwinding the corruptive intermediation of tax subsidies we've allowed to fester into the markets.

Its *either* meddle with the markets on a long term basis, and suffer the subsequent expanding feast & famine cycles, OR establish "flat playing field" arm's length regulation and get the government participation the heck OUT of the markets to allow the natural cyclical stabilization.

You can't have it both ways, unfortunately.
Dave


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RE: Is It Time to End the Mortgage Tax Deduction?

Well - of course there shouldn't be any deductions. That might be the right approach. Tax consumption not productivity.

Dave - are you suggesting that there is less volatility in countries that don't have the deduction? That there was not a huge price fall in those countries over the last few years? The unique problem in the US was the subprime issue which has absolutely nothing to do with the deductibility of the mortgage interest. It was government for sure trying to get everyone to own a house but using other mechanisms. It was lack regulation. But the bubble probably was mostly due to central banking monetary policy. To blame this entirely on mortgage interest deduction is a bit of a reach.

As far as it being mostly benefitting the upper middle class - that might be so. But we would just find another way of reducing our tax burden. You can encourage more expensive homes (which employ a lot of people to make) or you can encourage whole life policies. Remember - any interest was tax deductible not that long ago - somehow we have more debt problems now. Go figure.

The deduction has meant that the US has an amazing housing stock and that perhaps too many of our resources went into housing over the last 30 years. But the market has fixed that and we are shifting our resources to other things. The market has so much more power than the interest deduction. I don't think this bubble will be repeated in anyone's memory span.


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RE: Is It Time to End the Mortgage Tax Deduction?

david cary: for sure there is less volatility in countries that don't have the deduction, although I think it's a minor factor (we have had volatility in Vancouver and Toronto in the past decade) My home is still increasing in value, Ottawa being a market where prices have steadily increased but never jumped.

My point (previous post) is that the deduction has a huge impact on behaviour... why pay down a mortgage if it will reduce a tax credit? See stats for home equity and housing debt in Canada vs. US. Having a significant % of the population owing a lot on their homes is a recipe for disaster when prices drop or jobs are lost. Wait, this has happened in the US hasn't it.

Lest you think I'm picking on the US, Canada has made some stupid decisions that impact the economy, but that's another thread.


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RE: Is It Time to End the Mortgage Tax Deduction?

Exactly right. I just thought of what I would do if the deduction went away tomorrow. I would deleverage ASAP. I would pay twice my payment if I could afford to - probably would go ahead and re-fi to a 15 year.

Think of what that would do to a tenuous economy. I'd certainly be removing money from stocks to pay down my mortgage.

The world is already deleveraging. I really don't think now is the time to accelerate that. Am I wrong?

Does China have a mortgage deduction. Does anyone not think there is a significant real estate bubble in the major cities.


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RE: Is It Time to End the Mortgage Tax Deduction?

"Because we have before" isn't a good reason to keep doing something. Currently, most people do not buy a house and then live the next 30 years plus living there and paying it off. In an increasingly mobile society, the idea of an ownership subsidy is pretty outdated.”

How long you stay in a house has nothing to do with ownership vs. renting.
As a landlord I can tell you that I take better care of even my rental properties than any tenant ever does.

“Tax consumption not productivity.”

That is not any ‘fairer’ than taxing income, and gives a huge break to the wealthy.
They do not need to spend as much of their income for necessities.

“why pay down a mortgage if it will reduce a tax credit?”

Mortgages are not a “tax credit” they are a tax deduction, a very different animal.

Anyone who gets a mortgage JUST for the deduction is a fool. Period.

Having your taxable income reduced by a fraction of the mortgage interest you pay is never worth more than just keeping the money and paying the taxes.


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RE: Is It Time to End the Mortgage Tax Deduction?

Anyone else having trouble posting responses? I could only do this by copying from Notepad.

brickeyee: if not the deduction, what explains the difference in attitude toward paying down mortgage debt between Canada and the US? It can't just be a cultural issue.


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RE: Is It Time to End the Mortgage Tax Deduction?

"It can't just be a cultural issue."

Why not? Comparatively, Americans spend more and save less than Canadians across the board - not just on their mortgages.

"How long you stay in a house has nothing to do with ownership vs. renting. "

That is just flat wrong. There are large upfront costs in home purchases. That certainly needs to be considered. That is a trap many military families fall into. They want to own a home, but frequent transfers mean they rack up repeated closing costs and ownership becomes a really poor deal.


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RE: Is It Time to End the Mortgage Tax Deduction?

"There are large upfront costs in home purchases."

Not really.

A few percent of the purchase price unless you are paying extra points to buy down a mortgage rate.

"if not the deduction, what explains the difference in attitude toward paying down mortgage debt between Canada and the US? It can't just be a cultural issue."

It is a stupidity issue, and very widespread.

Paying $1000 on a mortgage to get a deduction that saves you $350 in taxes is not as good as simply paying $350 in taxes and having $650 in your pocket.

If you pay rent you are paying even more.
The $1000 in mortgage (even if the landlord is paying) AND $350 in taxes.
You are now out $1350.

Do not believe for a minute that the landlord is not passing every expense they can (and more) on to the renter.

The landlord does not have to pay any taxes on the portion of the rent covering the mortgage. You get a deduction against the rental income equal to the mortgage payment on the property.
It would still be better to not have a mortgage though.
On my free and clear hoses I make a lot more money (even after taxes on the income).

About the only time it is NOT worth paying down a mortgage is if you can earn significantly more by investing the money.

If you can get a return of 8% and your mortgage rate is 5% it is better to pay as little down on the mortgage and invest the money.
It is not without risk if the investment yield declines, but you can always switch to paying down the mortgage and lower the investment money (but buying in a down market for long term growth has its own up side).


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RE: Is It Time to End the Mortgage Tax Deduction?

""There are large upfront costs in home purchases."

Not really.

A few percent of the purchase price unless you are paying extra points to buy down a mortgage rate. "

"A few percent" plus all the fees is easily 5k+ for most people. If you are only living someplace for a short period of time, that is a HUGE deal. Then, when you go to sell, you end up paying 6%ish in commissions. Unless property values are appreciating rapidly, being a short term owner is a major money loser.


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RE: Is It Time to End the Mortgage Tax Deduction?

Brickeye - rates are 4-5% now. In a higher income bracket this comes to 3% or so. This makes having a mortgage a good idea.

The OP (who knows what is talking about) strongly encourages maximizing a mortgage and not paying it off early.

People not understanding math is one thing. Paying $1000 for a mortgage is far better than paying $1000 for rent. But the standard deduction has to be considered.


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RE: Is It Time to End the Mortgage Tax Deduction?

"Brickeye - rates are 4-5% now. In a higher income bracket this comes to 3% or so. This makes having a mortgage a good idea."

Except that with all the market instability lately reliably earning even 4-5% is pretty far from assured.

The numbers given were an example.

It is never worth buying a tax deduction that is a fraction of what the total outlay is.


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reRE: Is It Time to End the Mortgage Tax Deduction?

""A few percent" plus all the fees is easily 5k+ for most people. If you are only living someplace for a short period of time, that is a HUGE deal. Then, when you go to sell, you end up paying 6%ish in commissions. Unless property values are appreciating rapidly, being a short term owner is a major money loser. "

It still depends on what rental rates are for a comparable house.

You are going to be paying to live somewhere.

While short term holding is rarely profitable, depending on rental rates even if you add in buying and selling expenses it can still be cheaper than renting.

I have seen plenty of military folks willing to rent in rather down areas, but only willing to purchase in more upscale areas making a direct comparison invalid.


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RE: Is It Time to End the Mortgage Tax Deduction?

"It still depends on what rental rates are for a comparable house. "

And that is where tax subsidies for ownership come in. It doesn't help overall if the government taxes you a higher rate up front and then gives deductions for particular behaviors. Citizens don't come out ahead in that transaction. Any government imposed regulations or subsidies that distort the market create inefficiencies and drive overall prices up. Sometimes that is necessary (safety regulations etc) but the government should have a compelling and substantial reason to do so. Otherwise, they are just creating a cost with no clear benefit to consumers. A few select groups might benefit, but overall, we suffer.


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RE: Is It Time to End the Mortgage Tax Deduction?

Is It Time to End the Mortgage Tax Deduction?

What happen to the other business tax deductions, in addition to the mortage tax deduction that landloards have been enjoying by owning rental properties? Should end all of these deductions too.

Removing mortgage tax deduction slows down the homeownership of a regular people who does not have any other deductions. Potentially, makes them to pay rents longer to landlords who enjoy all type of subsidy through tax code. What a nice way to take from the poor and give to the rich.


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RE: Is It Time to End the Mortgage Tax Deduction?

"herwise, they are just creating a cost with no clear benefit to consumers. A few select groups might benefit, but overall, we suffer."

Who defines "consumers"?

The largest benefit of the mortgage deduction still goes to the middle class.

The bottom edge may not get a large benefit, and the upper edge may not 'need' the benefit.

These are artifacts of how the deduction plasy ageist the standard deduction.

At the low end the standard deduction is better than a low deduction, at the high end the deduction has less import since other methods of reducing tax liability are available.

If a change in the overall preference for ownership over renting is the goal, that would create different incentives (and tax rules to drive the goal).


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RE: Is It Time to End the Mortgage Tax Deduction?

"The largest benefit of the mortgage deduction still goes to the middle class. "

It is that kind of thinking that keeps the middle class heading downward. The government is keeping tax rates higher on the middle class and then allowing deductions for some. That isn't a net benefit no matter which way you slice it. It would clearly be much better for the middle class if they just gave less money to the government in the first place.


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RE: Is It Time to End the Mortgage Tax Deduction?

"It would clearly be much better for the middle class if they just gave less money to the government in the first place. "

That is a tautology, and not a useful point.


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RE: Is It Time to End the Mortgage Tax Deduction?

Just so we are clear. Landlords do not get the mortgage deduction. They get to treat interest as a business expense - that is not the same thing. You can eliminate the mortgage tax deduction and then only "landlords" get to claim interest as an expense.

Eliminate business tax deductions - stick it to those rich folks. Thankfully, even the Dems know that is foolhardy. If you have to pay taxes on all revenue without considering expenses, you would not have business. We all benefit from businesses being successful.

This discussion has gotten a bit OT.


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RE: Is It Time to End the Mortgage Tax Deduction?

If GW only had that darn FAQ thread, we could all have just have typed in the question, "Should the home mortgage tax deduction be eliminated?", and we would have all known the answer by now.


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RE: Is It Time to End the Mortgage Tax Deduction?

I'm really on the fence with this one. On the one hand I like my tax deduction, however; as a financial advisor I rarely tell people they should completely pay off their primary residence. This is because
1.) Tax deduction - Most likely your interest rate on your home is the lowest financing you have available so it should be the last thing paid off
2.) If your home is banked on, then it is creditor protect, somewhat.

It does seem like tax deductions on home get money to people who need it, or maybe that's just another excuse because I want a tax deduction :) .


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RE: Is It Time to End the Mortgage Tax Deduction?

"It does seem like tax deductions on home get money to people who need it..."

Who gets to decide if they are "people who need it"?

The tax code has been used as a social engineering tool for a long time, that is one of the reasons the thing is so larger (and confusing) with all sorts of 'gifts' and penalties (depending on what group you are in).

And then there is the continuing hue and cry of "Don't tax me, tax that guy over there. He has more."

The fact that "more" is present from the toil and sweat of the other guy (and often a lot of risk over the years) seems immaterial.


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RE: Is It Time to End the Mortgage Tax Deduction?

""It would clearly be much better for the middle class if they just gave less money to the government in the first place. "

That is a tautology, and not a useful point."

It seems you don't understand what a tautology is - nor a useful point. If you believed it was a tautology, then how can you be arguing against it?

The status quo is that we all pay certain tax rates and then some can claim this deduction to lower that rate. It would be preferable if we just had a lower tax rate to start with and scrapped this deduction. You seem to think the opposite of this - or are at least trying to make that argument.


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RE: Is It Time to End the Mortgage Tax Deduction?

I am not arguing against it, but as a point it is a tautology that is not germane.

Lower taxes are good for everyone.

How to afford government is a separate issue.

If the government gave the same breaks to individuals that every business has we would be paying a lot less also.

It is NOT going to happen under any administration.

The fact remains the tax code has been used for 'social engineering' for a long time now, and reversing course would have a LOT of unanticipated consequences.


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RE: Is It Time to End the Mortgage Tax Deduction?

I certainly hope it isn't the end, my schedule E has huge
parentheses with all of the investment properties.


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