The Mortgage Interest Deduction - Keep It or Delete It

If you have turned on the TV lately, glanced at a headline, or heard your co-workers talking at the water cooler, you have no doubt heard about our nation’s debt crisis. The Obama Administration has charged both houses of Congress with coming up with a plan to reduce the national debt.

One of the many suggestions that has surfaced is doing away with the long-standing mortgage interest deduction. Don’t do your own taxes or are not sure what this is? Basically, each year in the US, homeowners are able to take any amount of interest they pay for their mortgage as a deduction on their income taxes.

Touted as a boon by some in Washington, doing away with the mortgage interest deduction has the mortgage industry is up in arms. They claim that with as rocky as the mortgage industry has been over the past decade, another huge change is not a good idea right now.

Keep It:  Groups opposed to this change, namely the Mortgage Bankers Association and the National Association of REALTORS®, point out that this deduction is key to keeping the housing market affordable.

They also fear that this change would halt any progress the nation is making in stabilizing the housing market. A study done by NAR reveals that almost 75% of homeowners consider the mortgage interest deduction “extremely” or “very important”.

They argue that this data suggests that perhaps some could not or may not have bought homes without the deduction. Ron Phipps, President of NAR was recently quoted as saying that abolishing the mortgage interest deduction, “will effectively close the door on the American dream.”

Delete It: Currently, homeowners are able to deduct all the interest paid on their home loans from their tax returns each year. Additionally, investment properties and home equity loans are currently eligible to have some of their interest deducted.

Supporters of doing away with the deduction argue that as it is currently setup, only the wealthy benefit from the deduction. The reason being that lower income buyers are not likely to itemize their taxes and therefore do not get to take advantage of the savings. Their contention is that the deduction does not actually encourage homeownership, but rather helps the wealthy buy bigger homes.

Looking at it from a hard numbers perspective, this deduction is one of the largest in the U.S. tax code. The U.S. Treasury has estimated that this deduction will cost the U.S. $131 billion in 2012.

Change It: As a stopgap measure, the Obama Administration has proposed giving homeowners a 12 percent non-refundable tax credit on mortgages up to $500,000 for primary residences. This would eliminate the deduction for investment properties and home equity loans. Doing so would make the deduction available to every homeowner, not just the wealthy, or those who itemize.

So the fundamental question is this: Does the current mortgage interest deduction have such an impact on home sales that doing away with it would impede the function of the housing market? In reality, the answer is ‘no’. Homes were bought and sold regularly before the introduction of the deduction.

Also, though it figures in, those buying homes are likely not doing so because of the impact that homeownership will have on their taxes. As far as the question of whether the wealthy buy bigger homes in anticipation of the tax deduction, not likely. For the truly wealthy, a lot of those types of homes are paid for in full without financing. The next question is what effect the immediate change in the tax code would have on the housing market. That is hard to answer, but likely it would make little difference.

About The Author: This guest blog was written by Kimberley Kelly, a  Palm Springs real estate  agent in Southern California who has been licensed for 11 years. She is a great short sale Realtor for sellers in the Palm Desert Real Estate real estate market. You can check out Kim's writings by visiting her La Quinta real estate blog.