Profile picture for SoCal_Engr

Home Buyers - What if the federal government ends the mortgage interest deduction?

Does this affect your ability/desire to buy-v-rent?
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December 02 2012 - US
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Answers (8)

Profile picture for SteadyState
In general this will not (and should not) affect purchasing decisions. Currently there are many vested interests whose incomes are tied to this interest deduction.
Ask and answer the following objective questions: Should we (tax payers) provide incentives to borrow money for routine activities? Correspondingly, research which other countries offer the deduction for home purchases! The deduction was needed in 1913 to spur growth in housing to create suburbs with the advent of the automobile industry but its time has past.
The sky will not fall, agents will not starve, bank executives will not jump out of their corner offices, sellers will not weep, and buyers will not run to the hills when this deduction is eliminated in 2013. But the agents, sellers, bank executives, and buyers will cry before and during the elimination of this costly misplaced incentive.
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December 12 2012
The home mortgage deduction, as with all tax deductions, is an artifical governmental incentive to encourage a behavior.  By eliminating this artificial government incentive, you will return to normal market behavior.

To answer the question, you will initially see a drop in home sales as the artificial rate lowers to the natural rate.  Then, you will see it stabilize as the market norms prevail.
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December 04 2012
Profile picture for Pasadenan
Every tax deduction is a "subsidy" to one group of people at the expense of another.

Who is really being subsidized?  Is it not the lending industry?  Isn't the net effect to increase mortgage interest rates by somewhere between 15% and 33%?

Isn't is a "regressive tax" where those that make less money are subsidizing those at higher income?

If a party in the $250k income range gets a reduction of 1/3 of their interest rate, and a party at $60k income gets a reduction of 1/4 of their interest rate, and a party at $25k income gets a reduction of 1/6 of their interest rate, who is really paying for this subsidy?

And if market interest rates are really supposed to be between 7% and 10% presently, if it wasn't for government entities such as Freddie, Fannie, Gennie, and purchases of mortgaged backed securities by the Federal Reserve... then isn't this subsidy already occurring elsewhere on a much more massive scale?  Why should we double and triple the subsidies?  To what benefit?  For what purpose?

The federal reserve is already buying down the rate from 5% to 3.25%, which is already a 35% subsidy across the board.  And Fannie and Freddie reduced it from from 7.5% to 5% by eliminating normal market competition, which is already a 33% subsidy.  So with the federal government already giving all mortgage borrowers subsidies of 57% or more, what really is the point of the IRS giving an additional 33% subsidy to the mortgage industry for high income earners that buy more house than they need with more money borrowed than they need to borrow?

And yes, housing in Southern California is distorted in costs, and partially due to these unnecessary intentionally distorting subsidies.
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December 02 2012
Profile picture for SoCal_Engr
"Credit card interest is no longer a deduction, but people are still using credit cards."

Maybe, but my experience is that most of the people I know don't carry balances...hence, no interest. They're using the credit cards to access the various incentives (e.g., bonus miles, etc.).

"Mortgage interest" seems to be a different beast. However, it is possible that this perspective is regional (i.e., based on local property values and the consequent size of mortgages).

"Right now, mortgage interest deduction is a selling point for first time buyers, along with the property tax deduction. I hope these deductions are not lost!"

Both of these deductions are only accessed via the 1040a (the tax payer must be able to itemize vice taking the standard deduction). So, if the tax payer currently does not benefit from the mortgage interest deduction, they also do not benefit from the property tax deduction. Of course, eliminating either reduces the potential benefit of the other.
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December 02 2012
In the short term it may affect home sales. But in the long run, people will get over it, and maybe even forget it was ever there. Right now, mortgage interest deduction is a selling point for first time buyers, along with the property tax deduction. I hope these deductions are not lost!

I can remember a time when credit card interest was a deduction. Credit card interest is no longer a deduction, but people are still using credit cards.
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December 02 2012
Profile picture for SoCal_Engr
"Who will be see an impact? Those with large mortgages meaning often those in high income levels. Everyone should run their own numbers to see how much the mortgage interest tax deduction will affect their own finances - it may be less than expected."

I've heard this argument/perspective before, but I have to question it. Allowed 1040a deductions include:
-- state/local taxes
-- property taxes
-- mortgage interest
-- charitable contributions

Even excluding the mortgage interest deduction, the remaining deductions (for me, at least) far exceed the standard deduction. Does SoCal property values/taxes and income taxes skew this perspective, or would this hold across the US? Granted, the impact is not dollar-for-dollar, but it is not insignificant.
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December 02 2012
Profile picture for wetdawgs
Many buyers find that the mortgage interest tax deduction means little to nothing when they actually file their taxes.   Why is this?  Because they must be able to itemize, and must have sufficient interest payments to be able to reach the limits.  

Who will be see an impact?  Those with large mortgages meaning often those in high income levels.   Everyone should run their own numbers to see how much the mortgage interest tax deduction will affect their own finances - it may be less than expected.

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December 02 2012
The mortgage tax deduction is our government's fiscal policy to promote responsible home ownership. The mortgage tax deduction has existed since the initiation of income taxes in 1913. The elimination of the home interest deduction will negatively affect the housing recovery. Elimination of the deduction would damage the economy, cause home prices to drop and prevent some people from becoming first-time home buyers.
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December 02 2012
 
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